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Predicting The Present
1. State of the Economy
Hal Varian
Chief Economist
22 April 2009
Google Confidential and Proprietary
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2. The bad news
• Homes: U.S. home prices have fallen 27% since peak. Pending
sales fell 7.7% in January (though up slightly in west.)
• 2008 CPI: Full-year changes of +0.1% overall, +1.8% core.
Dramatic deceleration Q4 due to falling aggregate demand.
• March unemployment rate now at 8.5%,
• Manufacturing-Activity Index: Currently at 28-year low.
• Stock market: Down by 45% from peak.
• Bottom Line: The financial crisis contributed to an already weak
U.S. economy that officially entered a recession in 12/07. As of
April, it is now the the longest U.S. recession since the Great
Depression.
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4. No, really...
• Asset prices are low
•Houses – pending sales up 2.1% in February.
•Mortgages – conventional loans to qualified borrowers available
•Stocks – up 20% since March low
• Stimulus plan started in April
•Payroll tax cut started April 1 (up to $400 per person)
•Tax refunds larger
•Home buyer, auto purchase credit
•Some accelerated depreciation now available
• Inventories are being depleted, albeit slowly
•Housing
•Goods Google Confidential and Proprietary
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5. What happens in a recession?
• Delay everything that can be delayed
–Business investment
–State and local spending (due to tax receipts)
–Consumer durable purchase
–However, “consumer staples” usually see much smaller hit
•Government actions
–Want to avoid downward spiral
•Drop in demand … lay off workers … spending falls
•Need to stabilize demand: consumption, govn't, investment
–Trying a multipronged attack
Google Confidential and Proprietary
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7. Signs of hope
• Good news?
• Macroeconomics
–Financial situation stabilizing
•Particularly important for this
recession
–Market volatility coming down
•VIX index – volatility index though
back up again recently
•Ted Spread – gap between LIBOR
and T-bill rate
–Keep a close eye on these metrics,
as they are good leading indicators
Google Confidential and Proprietary
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8. Two sectors to watch: Real Estate and Autos
• Mortgage money available
• Auto loans to follow
• Real estate shows signs of stabilizing
– Queries showing usual seasonal
uplift
– May see further activity in Spring
• Automotive sector is depressed
– Expect to see very attractive terms
offered
– Also typical seasonal uplift
Google Confidential and Proprietary
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9. Implications for retail
• Q1 has been slow, but not as bad as Q4 for economy
–Impacted verticals
–Real estate, auto, appliances, furniture, travel, luxury items
–Less sensitive
–Low end shopping, health, local spending
•Areas to watch as leading indicators
–Automotive, real estate
–TED spread = 3 month Treasury bill rate – 3 month LIBOR
–Watch the VIX!
•Consumers are hunting for value
–Classic, reliable, solid...
Google Confidential and Proprietary
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10. Everybody talks about the economy...
• Can Google queries help
forecast economy activity?
•Government data released with a
lag
•Google data is real time
•Appears to be correlated with
current level of activity
•May be helpful in “predicting the
present”
•This is still 4-6 weeks before
official data release
Google Confidential and Proprietary
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13. Google Categories under Vehicle Brands
NOTE: Area represents the queries volume from first half year 2008 and the color represents queries yearly growth rate
Google Confidential and Proprietary 13
14. Model with Panel Data
Model:
log(Yi,t) = 1.681 + 0.3618 * log(Yi,t-1) + 0.4621 * log(Yi,t-12)
+ 0.0014 * Xi,t,2 + 0.0020 * Xi,t,2 + ai * Makei + ei,t
ei,t ~ N(0, 0.14972) , Adjusted R2 = 0.9791
Yi,t = Auto Sales of i-th Make at month t
Xi,t,1 = Google Trend Search at 1st week of month t and from i-th make
Xi,t,2 = Google Trend Search at 2nd week of month t and from i-th make
Makei = Dummy variable to indicate Auto Make
ai = Coefficient to capture the mean level of Auto Sales by Make
ANOVA Table
Df Sum Sq Mean Sq F value Pr(>F)
trends1 1 7.48 7.48 333.8334 < 2.2e-16 ***
trends2 1 1.71 1.71 76.2150 < 2.2e-16 ***
log(s1) 1 1609.52 1609.52 71826.7401 < 2.2e-16 ***
log(s12) 1 20.24 20.24 903.2351 < 2.2e-16 ***
as.factor(brand) 26 2.11 0.08 3.6301 2.36e-09 ***
Residuals 1535 34.40 0.02
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Google Confidential and Proprietary 14
15. Actual vs. Fitted Sales (Top 9 Make by Sales)
Google Confidential and Proprietary 15
16. Model with Univariate Time Series
Model:
log(Yi,t) = 3.0343 + 0.2054 * log(Yi,t-1) + 0.5396 * log(Yi,t-12) + 0.0034 * Xi,t,1 + ei,t
ei,t ~ N(0, 0.10512) , Adjusted R2 = 0.5804
Yi,t = Auto Sales of i-th Make at month t
Xi,t,1 = Google Trend Search at 1st week of month t and from i-th country
Makei = Dummy variable to indicate Auto Make
ANOVA Table
Df Sum Sq Mean Sq F value Pr(>F)
s1 1 0.23366 0.23366 21.151 2.603e-05 ***
log(s1) 1 0.36614 0.36614 33.142 4.171e-07 ***
log(s12) 1 0.30421 0.30421 27.537 2.651e-06 ***
Residuals 54 0.59657 0.01105
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17. Toyota Sales
1st Week of Month
Google Confidential and Proprietary 17
18. Other interesting things
• Government statistics
• automobile sales
• home sales
• retail sales
• travel
• Can look at state and city level data
• Geographic variation is often quite striking
• Great viz: http://www.slate.com/id/2216238/
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19. Large differences in state patterns of unemployment claims
Time Series Autocorrelation Function
Google Confidential and Proprietary
20. Model Fit and Prediction
Google Confidential and Proprietary