Can Google predict recessions?

Predicting recessions in real-time could be made possible by mining vast new sources of electronic data, according to a report released today by the C.D. Howe Institute.

In Predicting Recessions in Real-Time: Mining Google Trends and Electronic Payments Data for Clues, author Greg Tkacz considers whether Google searches and the growth of electronic payments variables, such as debit and credit card transactions, would have predicted the 2008 – 2009 recession.

Read: “Google Glass” dubbed a mobile breakthrough

“New sources of electronically recorded data are both timely and reflect the real-time intentions of millions (or billions) of agents,” commented Tkacz. “Most policymakers and economists failed to predict the last recession because of the lag in traditional economic data. I look at the search data in Google Trends, as well as electronic payments data, to see if the recession signals were there in real time. “

Many official economic indicators, he explains, are released with a time lag, released infrequently and often require revision. Not too long ago, Canadian empirical macroeconomic researchers would have to wait two months for the release of the monthly National Accounts in order to update their models and forecasts.

However, in the last 10-to-20 years, technological innovations have resulted in vast amounts of other data being recorded electronically and stored. New data series are now being generated at a rate faster than analysts can study them, he notes.

Read: Recession proof your practice: Part One

Due to the emergence of Google as the dominant search engine, its search-term usage can provide a snapshot of current group interests in numerous issues, such as economics, politics, health, etc. In principle, if many people are entering the same economic search terms, this could provide a clue about changing conditions, such as the onset of a recession.

Tkacz finds that the usage of Google search terms “recession” and “jobs” could have predicted the last recession up to three months in advance of its onset. However, he cautions that since Google query data are only available from 2004, the time span studied is very short in the context of business cycles. Consequently, the study should be viewed as illustrative of the potential uses of electronic data. He also highlights the benefits and pitfalls that users of Google data may encounter in the context of economic monitoring.

Read: Recession proof your practice: Part Two

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.