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September 3, 2012

Google searches and trash production may be next recession predictor

by Central Coast Lending

How does that old line go? The only certainties in life are… death and taxes. Benjamin Franklin’s clever social commentary reminds us to pay our taxes and die and the rest is variable. Today, economists and political scientists are attempting to glean a few more certainties from the scraps of our daily life. Studies have found Google search volume and trash collection to be indicators that can inform and even predict economic behavior.

The parade of economic statistics are endless. Retail sales, home prices, unemployment, and manufacturing numbers provide data about economic health, but they all have a crucial shortcoming: they profile the past. Investors (large and small), the government, and the Federal Reserve all act based on this data, but it often takes months to catch up to reality, making preventative action nearly impossible.

To process our behaviors (and feelings) in real time, authorities have turned to Google and trash collection as constants of the modern age.

Prominent central banks around the world now analyze Google searches to enrich economic forecasts from auto and home sales to retail spending. The article “What is Your Central Banker Googling”, published in the August 13 – 26 issue of Bloomberg Businessweek magazine reports that the U.S. Federal Reserve and the central banks of Israel, Britain, Italy, Spain, Turkey and Chile are analyzing keyword counts on Google to contextualize consumer demand in an attempt to find correlation to broader economic trends.

In April 2009, Google’s chief economist Hal Varian wrote a report about user searches for keywords and how the Google activity could improve “forecasts of auto and home sales and retail spending in the US.” Varian found that analysis of Google searches has a predictive quality in advance of published economic indicators.

On example listed by the article: Rebecca Helerstein and Menno Middeldorp at the New York Fed found that the Google searches for “Mortgage Refinance” improved the refinancing application forecast model.

There are limitations. Stretching back to 2004, the sample size is limited and constrained to the demographics that are more likely to use Google searches.

Trash analysis is another link that provides data and context for consumer behavior.

Economist Michael McDonough posits that gross domestic product (GDP) is correlated to the volume of trash shipped on freight cars to landfills. Healthy economies (and higher consumption levels) produce more trash. In 2010, Bloomberg News found an 82.4 percent statistical correlation between GDP and carloads of waste since 1994.

The problem is that the movement of trash production is not constantly predictive. Sometimes it moves before GDP and sometimes it moves after the economic metric.

The 3rd quarter has seen a sharp decline in trash production, signaling the possibility that the second quarter’s poor GDP could become even weaker as we move forward. However, as students move back to school in the fall, we will most certainly see an uptick in trash as families purchase new goods to replace the old.

Consumers are uncertain about the future of the economy, and attempting to be versatile. In the housing market, this has translated to the popularity of renting over home buying. We could be seeing a similar trend, as consumer choose to purchase quality used goods as opposed to new purchases.

Anybody remember the lipstick index? Coined by Estee Lauder charman Leonard Lauder over a decade ago, the “lipstick index” suggested that during tough times, consumers switched from high-end purchases to cheap beauty products like lipstick. Different indicators may rise and fall to reflect social conditions and trends for different times. The lipstick index has taken a backseat to the so-called “nail polish index” (54 percent increase in sales) during the most recent decline.

Today, waste is a byproduct of consumption and we take knowledge as a basic right. The only thing certain in life is trash and Google - you can’t put lipstick on a pig, but you can analyze its behavior if you look close enough.


Central Coast Lending is a California mortgage brokerage based in San Luis Obispo County. With offices in San Luis Obispo, Morro Bay, Paso Robles, and Arroyo Grande, Central Coast Lending is the top source for Central Coast mortgage, real estate, and home loan needs. To see why using a broker offers lower rates and superior service, click HERE. For a free, hassle-free online pre-qualification click HERE or call 805.543.LOAN to talk to one of our expert loan officers.

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