This article was written by John Lafare, SCORE Orange County Management Counselor
The recent grand opening of the Burj Dubai reminded me of the Skyscraper Index. Everybody follows the gyrations of the markets and the global economy, relying on the S&P 500 or GDP statistics, but there is a much more reliable (albeit not scientific) indicator by which to plan the future of your business. Back in 1999, at the height of the tech bubble, Andrew Lawrence, a research director at Deutsche Bank, created the "Skyscraper Index," which showed that the world's tallest buildings have risen on the eve of economic downturns.
This correlation is far from pure coincidence, and the business cycle theory of the Austrian school of economics actually provides a solid theoretical foundation for the concept. Lawrence’s study has also been the subject of scholarly papers published in English, German and Czech as well as scores of newspaper articles.
You may note that as of November 2008, as markets were collapsing around the world, a host of gigantic buildings were rising into the sky, many of them to be stopped halfway up or destined to remain without tenants into the future. In fact, of a list of the world’s tallest 20 buildings compiled by the website about.com, 14 remain unfinished.
History being history, Lawrence started tracing the correlation of the world’s latest tallest building with the construction of the Singer Building in New York, completed in 1908 just after the Panic of 1907, also known as the Banker’s Panic, in which the New York Stock Exchange fell 50 percent from its peak a year earlier. In 1929, 40 Wall Street Tower was completed – we recall what happened in that year – followed by the Chrysler Building in 1930 and the Empire State Building in 1931, which remained nearly empty for years. In 1973, the ill-fated World Trade Center in New York and the Sears Tower topped out just in time for the recession of 1973-1975, considered at the time to be the most severe since World War II. The Petronas Towers in Kuala Lumpur, then the world’s tallest buildings, and the Baiyoke Tower in Bangkok, Thailand’s tallest, were finished in 1997, just in time for the Asian financial crisis.
The world’s tallest buildings obviously don’t cause economic collapses. But inevitably hubris catches up with businessmen at the end of long booms and they can’t resist. It is usually a time of overinvestment, rampant speculation, and monetary expansion – all of which the world had in spades at the start of 2008. Indeed, the common pattern that correlates skyscrapers with economic disasters starts first with a period of easy money, leading to a rapid expansion of the economy and a boom in the stock market.
So, if you want to find out what the future holds for you and your business, just watch the skyline. If you see it dominated by giant cranes, then my advice is to run for cover.