Skyscrapers as Economic Indicators

Ever hear of interesting economic indicators such as the correlation between the economy and length of skirts?  Here’s one urbanists should appreciate: the skyscraper index, which shows strong correlation between the completion of world’s tallest buildings and downturns in the business cycle.  Mark Thornton discusses the skyscraper index in his article, Skyscrapers and Business Cycles [or mp3 read by the author], which was originally published in the Quarterly Journal of Austrian Economics:

The skyscraper is the great architectural contribution of modern capitalistic society and is even one of the yardsticks for 20th-century superheroes, but no one had ever really connected it with the quintessential feature of modern capitalistic history — the business cycle. Then in 1999, economist Andrew Lawrence created the “skyscraper index” which purported to show that the building of the tallest skyscrapers is coincidental with business cycles, in that he found that the building of world’s tallest building is a good proxy for dating the onset of major economic downturns. Lawrence described his index as an “unhealthy 100 year correlation.”

• Introduction
• Do Skyscrapers Predict?
• Table 1: Skyscrapers and Economic Crisis
• Figure 1: Skyscrapers and Economic Crisis
• Cantillon Effects in Skyscrapers
• Cantilloned Buildings and Business Cycles
• When the Skyscraper Index Is Wrong
• References
• Notes

While macro business cycle theory is beyond my core strength in economics and the scope of this blog, this is a particularly interesting topic to me as I am an economics enthusiast with a passion for tall buildings.  The basic premise is that construction of worlds tallest buildings has strong corelation with economic downturns.  Construction of these buildings begin during times of economic expansion towards the peak of business cycles.  However, by the time the buildings are complete, the market has taken a turn for the worse.  Could the Burj Dubai be an indicator that tough times are ahead?

The common pattern in these four historical episodes contains the following features. First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies that in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter, negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital- and technology-intensive industries. While this analysis concentrates on the US economy, the impact of these crises was often felt outside the domestic economy.

Thornton tells us three main effects of the business cycle on skyscrapers.  First, looking at the fundamentals of the economics of land development and interest rates:

When the rate of interest is falling, the land best suited for the production of the longer-term, more capital-intensive, and more roundabout methods of production will increase in price relative to land better suited for shorter term, more direct methods of production. …  Simplified, higher prices for land reduce the ratio of the per-floor cost of tall vs. short buildings and thus create the incentive to build buildings taller to spread the land cost over a larger number of floors. Lower rates of interest also reduce the cost of capital, which facilitates the ability to build taller. Thus, higher land cost leads to taller buildings.

Second, lower interest rates enabling larger firm sizes:

A lower cost of capital encourages firms to grow in size and to become more capital intensive and to take advantages of economies of scale. Production and distribution become more specialized and take place over a larger territory.

The third being improved technology as a result of investment in research and development of taller buildings:

Buildings that reach new heights pose numerous engineering and technological problems relating to such issues as building a sufficiently strong foundation, ventilation, heating, cooling, lighting, transportation (elevators, stairs, parking), communication, electrical power, plumbing, wind resistance, structural integrity, fire protection, and building security.

Beyond the mere technology it takes to build the world’s tallest building, every vertical beam, tube, or shaft in a building takes away from rentable space on each floor built, and the more floors in the structure, the greater the required capacity of each system in the building, whether it is plumbing, ventilation, or elevators. Hence, there is a tremendous desire to innovate with technology in order to conserve on the size of building systems or to increase the capacity of those systems. Therefore, as the height of construction rises, input suppliers must go back to the drawing board and reinvent themselves, their products, and their production processes.

An office building is a capital good that is used to bring a variety of consumer goods to market in the sense that production in the office building involves the decision-making process over all aspects of the firm. Its use is ubiquitous in “big business” and is totally absent in small businesses such as family farms, hot dog stands, plumbing services, auto body repair shops, etc. The office building is a critical capital good in very roundabout production processes that represent virtually all modern production and all cutting-edge goods and service production. The modern economy is inextricably linked with the large office building or as Carol Willis (1995, p. 181) put it: “Skyscrapers are the ultimate architecture of capitalism.”

The skyscraper is not just a large version of the office building. Skyscrapers can be used to house the offices of a single corporation, the central offices and branch offices of multiple corporations, hotel and residential living space, commercial space, convention space, a wide variety of personal service businesses, and specialized tenants such as stock exchanges, theaters, and television studios. The skyscraper can serve as a much larger and more advanced office building (being both more productive and producing a higher-quality service). It can even take on the status of a business community or specialized form of privately controlled marketplace. Naturally, greater amounts and diversity of production are possible in larger skyscrapers. The world’s tallest building, past and present, also adds the status of a distinct address.

An interesting fact to consider is that the Burj Dubai is the first world’s tallest to be residential and not office.  Does it reflect the unique market cycle we are now in where the credit bubble resulted in a world’s tallest building with a non-commercial primary use?  Is it somehow telling that the Burj Dubai is not a skyscraper directly meeting the needs of big business?

Of course, the skyscraper index is not perfect, but Thornton examines the main counterexamples to the index, such as New York’s Woolworth Building.