The Skyscraper Index: Is It Time To Flee The Building?

Posted by Michael Lindberg on Sep 9, 2018 12:21:49 PM

skyscraper index

It’s Time To Flee The Skyscraper!

Did you ever hear about the “Skyscraper Index”? It was developed by Andrew Lawrence, a property analyst at Dresdner Kleinwort Wasserstein, in 1999 and it showed that the world's tallest buildings have risen just before the world experiences an economic downturn. That’s why the coming “Kingdom Tower” in Saudi-Arabia and “The Tower” in Dubai – which will both be taller than the current record holder, the 828 meter high Burj Khalifa, also in Dubai - scares me a bit because if Andrew Lawrence is right, they are a sign that the world will soon face a recession.

 

However, in my world of research, we often tell each other that correlation does not necessarily mean causation. Or in other words: Yes, there may be a correlation between the construction of the world’s tallest buildings and a subsequent recession, but that does not necessarily mean that a recession will follow the construction. Some very smart people have spent a lot of time on investigating this and here’s what they found:

 

The height of buildings is not an accurate predictor of recessions or other aspects of the business cycle, but Gross Domestic Product (GDP) can predict the height of building construction.

 

So when things go well (a high GDP) we start constructing tall buildings.

Avoiding Complacency

Makes sense – because when things go well we have a tendency to become complacent. But don’t we all know that “What goes up must come down”? Not the buildings, I hope, but the economy. Don’t we know that a recession always follows a period of economic growth? Those of us who experienced the boom years before what has now come to be known as “The Great Recession of 2008” should know. Because wasn’t it like this for many of us that we felt we could walk on water? Until, all of a sudden, many unfortunately drowned.

 

One certain sign that an economy is going to retract is when the interest rates increase, and that’s the situation we're now facing. The US is still the world’s biggest economy and even though Trump is doing his best to move towards a more closed economy among other things, by means of tariffs, it still has a big impact on the rest of the world. So when The Federal Reserve raises US interest rates it will slow down the economy not only in the US, but also in the rest of the world (and so will any trade war). So isn’t it time to take a close look at your company and at least prepare for a likely situation of a retracting economy or even a recession?

Break Your Business Model

You might feel that I’m too pessimistic – and I hope you’re right. On the other hand, it’s a fact that all humans, including managers, see the world through their own unique filters. Essentially we see what we want to see and accept those ideas which match our beliefs and reject those that don’t. And when our companies are growing and profitable we tend to become complacent. The old adage, “If it ain’t broke, don’t fix it” means if something is working adequately, leave it alone. But I suggest to turn it around: “If it ain’t broke, break it!” - before it’s too late.

 

What should you do? In my mind there is no doubt: You need to look at your entire business model and make it future proof. And I’m not the only one who says so.

 

Alexander Osterwalder claims that “companies that are not capable of systematically innovating their business model will have to fight to thrive and survive”. And Oliver Gasmman is adamant when he writes: “In future, competition will take place between business models, and not just between products and technologies”.

 

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Topics: Business Model Innovation, Disruptive Innovation, Change