How Google can tell the Bank of England what to do next

Economics Editor,Sean O'Grady
Monday 13 June 2011 00:00 BST

Researchers at the Bank of England have discovered that internet searches for specific related terms are a powerful predictive tool for seeing where unemployment and house prices will go in the future.

Taking search terms such as "estate agent", "mortgage", "unemployed" and "jobseekers allowance" and comparing their frequency over a period of years with actual subsequent movements in house values and the claimant count produced results that "have the potential to be useful for economic policy making" and in some cases beat existing guides such as surveys of public opinion.

The Bank's chief economist, Spencer Dale, said that they "can contain valuable signals about the state of both labour and housing markets in the United Kingdom". The authors of the research, Nick McLaren and Rachana Shanbhogue, said: "Internet search data can help to predict changes in unemployment in the UK. These appear to be as useful as existing indicators. For house prices, the results are somewhat stronger: search term variables can outperform some existing indicators over the period since 2004. There is also evidence that these data could provide additional insight on a wider range of issues."

Both the sharp rise in unemployment since 2008 and the decline in real estate values could have been predicted using the Google database; and the researchers suggest that searches such as "flat screen television" and "fridges" could give a much more immediate impression of what's going on in the economy than waiting for the official data – so called "nowcasting".

They add: "Internet search data have a number of appealing properties as economic indicators. They are extremely timely and cover a potentially vast sample of respondents.

"In contrast to most traditional survey methods, they are collected as a by-product of normal activity, rather than requiring individuals or firms to respond to survey questions after the event. This can avoid problems associated with non-response or inaccurate responses. And it also means that information is collected on a wider range of issues. As a result, search data can help analyse issues that arise unexpectedly."

The Bank's tentative embrace of such unconventional and easily decipherable techniques might help it to avoid what seems to be a damaging decline in the public's confidence in its ability to do its job. At a time when the bank is accruing unpredicted powers over the economy and the financial system, taking over the Financial Services Authority and regulating mortgage supply, the Bank's quarterly bulletin admits that "the extent of public satisfaction with the way in which the Bank has set interest rates to control inflation has declined since the middle of 2010".

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