Varian: Google Trends Predicts the Present

If you can predict the future better than other people, you will soon become rich.
If you can know better than other people what is happening right now, that is almost as good. After all, if no one else finds out the truth until a month after the fact, the present might as well be the future — nobody knows it.
For instance, many economic indicators move markets: reports about the unemployment rate, crude oil inventories, etc. All of these are lagging indicators. They report information well after the actual events have occurred. If you can predict the reports ahead of time (and you know how the markets are likely to react to the number in the indicator), you can front-run the market.
I’ve always thought that traffic delays might be a good predictor of current economic activity. If the roads are clogged at rush hour, that is a good sign for economic activity. Busier highways in late morning and early afternoon is probably a bad sign. I’ve never managed to track down the right data to test this hypothesis. It was just too much work.
As with so many other things, Google provides a better way to solve the problem. Hal Varian‘s excellent piece (summarized on the Google research blog, through which you can get the full report) explores how you can substantially improve the predictive ability of forecasting models by using information in Google Trends. It could hardly be easier — certainly much easier than trying to monitor traffic data from 200 different U.S. cities.
Of course, the fact that it is easy is bad news for anyone who wants to profit from it. If things are too easy, everyone can build it into their models, arbitraging away the value.