Skyscrapper Effect – Definition

Cite this article as:"Skyscrapper Effect – Definition," in The Business Professor, updated February 22, 2020, last accessed October 28, 2020, https://thebusinessprofessor.com/lesson/skyscrapper-effect-definition/.

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Skyscraper Effect Definition

The skyscraper index or Skyscraper effect, which was developed by an economist named Andrew Lawrence, shows a correlation between the construction of the highest building in the world and the business cycle. According to Business Cycle, the skyscraper is the great architectural achievement of modern capitalist society and is even one of the cornerstones of the 20th-century superheroes, but it has never really been connected to the quintessential features of modern capitalist culture; until Andrew Lawrence created the “skyscraper index”. The Index revealed that on the verge of economic downturns the world’s tallest buildings have risen. Business cycles and skyscrapers’ construction correlate so that investment in skyscrapers climbs when cyclical growth is depleted and the economy is ready for recession.

A Little More on What is the Skyscraper Effect

Often times, economic professionals refer to the skyscraper index as a curse for skyscrapers, or a curse of the tower in Babel. This is in reference to the myth of Babel’s Tower from the Genesis book of the bible. The curse was said to have happened because the people tried to build a tower extending into the heavens. Then in 1999, economist Andrew Lawrence created the “skyscraper index” which allegedly showed that the construction of the highest skyscrapers coincided with business cycles, in that he found that the construction of the highest building in the world was a good proxy for the start of major economic downturns. Lawrence described his index as an “unhealthy 100-year correlation.”

Notable Historical Scenarios That Support The Skyscraper Index

  • Two of the earliest world’s tallest commercial buildings between 1899 and 1901 – The 391-foot Park Row building and the 548 feet Philadelphia City Hall were followed by the NYSE Market crash in 1901.
  • After the construction of the 700ft Met Life Tower, the Banker’s Panic occurred in 1907 and a financial crisis arose.
  • The Great Depression began in the early 1930s when the 1250ft Empire State Building was completed in 1931.
  • A long period of inflation was plaguing the US economy, owing to high oil prices in 1973 and the resulting stock market crash from 1973 to 1974; not long after the 1,368ft Original One World Trade Center was completed in 1972
  • The 1998 peak financial crisis in Asia happened after the Malaysian Petronas Towers was built.

Correlation between the Development of a Skyscraper and  Economic Crisis

A period of economic boom, which represents a higher GDP, low rate of unemployment and rising asset prices, is typically a result of an economic bust. Specific ongoing events, such as new technology, usually drive rapid economic growth. If a project like the world’s biggest building receives the needed funding to start constructing, then the economy can be seen to have grown to such a degree that in the near future the likelihood of a bust is strong. The construction of a gigantic skyscraper thus suggests that the expansionary economy has reached its peak and must be right by facing a recessionary period in the near future. This explains the Skyscraper’s Effect postulation.

References for “Skyscraper Effect

https://www.investopedia.com/terms/s/skyscraper-effect.asp

https://www.businessinsider.com/skyscraper-index-skyscrapers-signal-financial-recessi…

https://www.bbc.com/news/magazine-33426889

https://en.wikipedia.org/wiki/Skyscraper_Index

https://www.lghvacstory.com/skyscraper-wind-effect/

https://mises.org/library/skyscrapers-and-business-cycles

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