Google As An Economic Indicator

When Google (NASDAQ: GOOG) releases its earnings, it does not disclose how many searches are performed in a quarter. It must be in the hundreds of billions, at least. Google also runs hundreds of thousand of ads each quarter, each tethered to a search result. That universe is so huge and Google’s activity is spread over such a significant part of the world that it is fair to say that Google’s health is some measure of the global economy. If that is so, the economy has picked up.

Google reported revenues of $9.03 billion in the second quarter of 2011, representing a 32% increase over second quarter 2010 revenues of $6.82 billion. Revenues from outside of the U.S. totaled $4.87 billion, representing 54% of total revenues. Those are certainly clues that what is spent on marketing by massive numbers of companies inside and outside the U.S. has picked up. And perhaps the most critical figures in the earnings statement are aggregate paid clicks and average cost-per-click. Aggregate paid clicks, which include “clicks related to ads served on Google sites and the sites of our AdSense partners,” increased approximately 18%. Average cost-per-click, “which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 12%.” Companies are not just putting more marketing messages on Google. They are, on the whole, spending more money to place those messages there.

There was a time, before Google became large, when economists could look to the results of GE’s (NYSE: GE) global economic activity, particularly among businesses as a measure of enterprise health. The same held true for Procter & Gamble (NYSE: PG), which was a reasonable proxy for consumer activity and the cost of commodities, manufacturing and distribution. Each was flawed to the extent that the universe of buyers of GE’s energy, infrastructure, entertainment and financial businesses are fairly small compared with the number of clients that Google has. Procter & Gamble was a good gauge of what consumers spent on soap and razors. It was not as good a way to see where people spent their money when they were in stores and malls. Google, however, is used by retailers across the globe, along with soap sellers and companies that sell energy and financial service. A search for “GE energy” brings back everything from the number of jobs GE has open in its energy divisions to what huge clients have spent on GE’s most expensive energy infrastructure products.

The flaw in the use of Google as a measure of economic activity is that the world’s largest search firm does not offer earnings forecasts. If it did, those projections would be a reasonable proxy for what many economic forecasts do.

Douglas A. McIntyre