Central banks are watching your Google searches to spot the trend

SAN FRANCISCO: Margo Sugarman spent months last year searching on Google for the appliances to complete her dream kitchen , scouring the internet for information on the latest double ovens and low-noise mixers. Not only did those queries guide the Tel Mond, Israel, resident to the best deals for her 70,000-shekel ($17,680) renovation , they also helped the Bank of Israel , which looks to searches like Sugarman’s to assess the state of the nation’s $243 billion economy. The central bank stands at the forefront of the world’s hunt for new economic indicators, analyzing keyword counts for everything from aerobics classes to refrigerators — reported by Google almost as soon as the queries take place — to gauge consumer demand before official statistics are released .

The Federal Reserve and the central banks of England, Italy, Spain and Chile have followed up with their own studies to see if search volumes track trends in the economies they oversee. At stake is the ability of the guardians to deploy nimbler policy responses. Greater foresight could make the difference between a slowdown and a recession , a recovery and an inflation-stoking boom, according to Erik Brynjolfsson, a member of the Federal Reserve Bank of Boston’s Academic Advisory Council. “When central bankers were looking at traditional data, they were essentially looking out the rear-view mirror,” said Brynjolfsson, a professor at the Massachusetts Institute of Technology in Cambridge. The December 2009 study he co-authored on predicting US home sales using search volumes was cited by three of the central bank studies.

‘BETTER FORECASTS’

“If the Fed had had access to this information , they would have been able to make better forecasts of what was happening to the housing market and known more quickly the depth of the problem” during the 2007-2009 recession, he said. It all started with a hunch in Mountain View, California. On the heels of developing a new website reporting how often users searched for certain keywords, Hal Varian, Google’s chief economist , said he wondered whether this data could foreshadow what traditional economic reports would show later. So he ran the numbers. “The ‘aha moment’ was, gee, this actually works,” Varian said in an interview . The result was a 23-page paper he co-wrote in April 2009, demonstrating how data reported on the Google Trends service improved forecasts of auto and home sales and retail spending in the US.

NEW DATA

Tanya Suhoy, a senior economist at the Bank of Israel , released a paper three months later finding that the new data helped predict slowdowns and slumps in Israel. Economists from the Central Bank of Chile to the Bank of England soon began to ask similar questions: Did more people browsing for cars predict an increase in auto sales? Was a jump in research on unemployment benefits a hint that people were losing jobs? Neither Varian nor MIT’s Brynjolfsson say they are surprised central bankers have been particularly interested in the technique: One of the challenges of policy making has been having to set interest rates based on delayed economic information. Google makes its data available one to three days after users perform searches. The US commerce department typically publishes its monthly report on retail sales two weeks into the following month. “With monetary policy, you can turn the spigot left and right in a few seconds ,” said Varian, whose former students from his more than three-decade teaching career include Fed chairman Ben S Bernanke. “If you’re going to be more responsive, you need to have upto-date information.”