Can the World's Tallest Buildings Predict the Next Recession?

New York City recently announced plans to spend $20 billion to build Hudson Yards, a neighborhood of skyscrapers geared toward attracting millennials to the city's workforce, with construction projects wrapping up between 2015 and 2024. While the project highlights the growing economic optimism at the moment, Hudson Yards doesn't feature any of the world's tallest buildings. It would be difficult to match plans for Kingdom Tower in Saudi Arabia, anyway, which is designed to be 1 kilometer high when completed in 2019. Ditto for Phoenix Towers in China, also designed to be 1 kilometer high when completed in 2018.

Rendering of Kingdom Tower. The air terrace is on the 157th floor. Source: Wikimedia Commons.

You may not think that matters to you, but unfortunately, there's a long history of real estate developers who become too greedy when economic growth appears to be stabilizing. The world's tallest buildings are often -- and eerily -- constructed immediately before, during, or after economic downturns or major recessions. The relationship is called the Skyscraper Index. Can the world's tallest buildings really predict the next recession?

What is the Skyscraper Index?
First proposed by property analyst Dresdner Kleinwort Wasserstein in 1999, the Skyscraper Index appears to demonstrate that the end of construction for the world's tallest buildings correlates with global economic troughs. Take Burj Khalifa in the United Arab Emirates as the most recent example. The skyscraper's construction began in fall 2004 and was slated for completion in fall 2009, but it wasn't completed until January 2010 thanks in part to the Great Recession.

Source: Wikimedia Commons /Rama.

Although it highlights the generally bullish attitude on global economic growth, Burj Khalifa is just one example of the Skyscraper Index in action. Consider that each of the world's seven tallest buildings standing or under construction today were or will be completed after 2010.

Source: World Almanac 2014.

Well, of course technological innovation will push skyscrapers closer to the clouds and make the top of the list overpopulated with more recent construction. But there certainly appears to be a correlation between the world's tallest building and recessions. Consider the following relationship between some of the world's most notable recessions and the tallest buildings under or finishing construction at the time.

Source: Wikipedia.

Is there something here, or are researchers just cherry-picking the data? You may or may not believe that there's a real correlation between skyscraper height and economic recessions, but while Americans are worried about the progress of the "Housing Recovery," other nations have poured hundreds of billions -- even trillions -- of dollars into real estate development. For instance, China has built entire cities in an attempt to boost economic development. What's wrong with that? Well, many of them lie empty or outrageously out of reach for most Chinese citizens.

Can the Skyscraper Index predict recessions?
Studies have concluded that the height of buildings doesn't predict economic downturns, although GDP can be a predictor of the appetite for new construction (and many other things). Similarly, economic recessions occur, on average, about every decade or so, which happens to line up perfectly with the planned completion dates of the Phoenix Towers and Kingdom Tower. However, that appears to be more coincidence than a predictable pattern chalked up to the Skyscraper Index.

What should investors do? First, realize that recessions are a relatively normal occurrence. You'll see about half a dozen in your lifetime. Second, make steady contributions to your portfolio while taking a long-term approach, which remains your biggest advantage over Wall Street -- or greedy real estate developers.