Google does "the wisdom of crowds."

Google trends offers a near real-time view of life concerns. Image: Google

If you think about the millions of searches conducted daily using Google, (GOOG) there is reason to believe you ought to be able to divine patterns or trends from the activity. If everyone is searching for a particular song for example, you might expect that artist to climb the charts. If searches are fast and furious for a digital camera, sales ought to correspondingly increase.

But can examining a broader swath of Google searches related to specific industries inform where those sectors, and the broader economy is headed? The propeller-heads at Google think it can.

Tucked away inside Google Finance is the newly-launched, “Google Domestic Trends”.  While it sounds like it might offer the latest in recipes for meatloaf or techniques for pressing a shirt collar, what it does is track search traffic across 23 specific sectors of the economy ranging from auto buyers, to jobs and the retail trade.

All indices use January 1, 2004 as a baseline from which a seven-day moving average is calculated. So if you look at auto buyers, you will see a more or less predictable seasonal car-buying pattern, peaking during the late spring and summer when people are looking at the new models and dealers cut prices on last year’s stock. The number of searches for cars falls off around the winter holidays before ticking up again at the end of the year, presumably for tax reasons.

The economy, reflected in search activitiy

As might be expected, the volume of searches for cars was generally lower this year compared to the last five years as the recession scared consumers into sticking with their jalopies. That is until the “cash-for-clunkers” program kicked in, producing an enormous spike in search volume Aug. 7 that dwarfs any point on the auto buyer index.

If you plot actual monthly retail clothing sales from the U.S. Census Bureau compared to the volume of retail sales searches on Google over the past two years, you see both decreasing over time, especially during the peak holiday buying season.

The idea that Google searches might be able to put a finer point on economic trends came from research around unemployment Google’s Chief Economist Hal Varian (that’s right, Google has its own economist) did using Google Trends.  Google Trends constantly updates the most popular search queries.

What Varian found is that by building a model to forecast initial unemployment claims, and then adding in Google Trends data around unemployment the forecast results were more accurate. The idea is that you could better forecast car sales, travel, construction – you name it – using other categories of search volume data.

Google is not building forecast models for people with Domestic Trends; it’s just offering the general volume data. How you plug it into your own forecast model is your business. Is Google Domestic Trends a crystal ball into sectors and the fortunes of companies within them? No, but it is more data, and that can never hurt in making decisions nor in getting a clearer view on the economy.

As Varian writes on his blog: “It has been said that if you put a million monkeys in front of a million computers, you would eventually produce an accurate economic forecast. Let's see how well that theory works…”

Think of the jagged light blue line in the fever chart at right as the bubble of hype that keeps Apple's (AAPL) iPhone floating above of its competitors.

What you're looking at is a snapshot of a Google Trends chart comparing the number of times the word  "iPhone" appears in a Google search request with the words "Palm" (PALM), Research in Motion's (RIMM) "BlackBerry," Microsoft's (MSFT) "Windows Mobile" and Google's (GOOG) "Android."

The full chart — going back to 2004 — and the color key are pasted below the fold. Or you can click here to recreate the chart on your Web browser.

Google Trends is a powerful tool. It has been used, most famously, to monitor influenza outbreaks by tracking flu-related Google searches — a epidemiological early warning sign that turns out to be more prescient, by two weeks, than the U.S. Centers for Disease Control's surveys of 1,500 hospitals. (Google explains its methodology here, with a link to an article in Nature.)

You can do a Google Trends search on anything. Blogging pioneer Dave Winer ran a series recently comparing "Twitter," "Web 2.0" and "RSS." Twitter won that clap-o-meter competition hands down. Twitter's micro-blogging tool been a hot media topic for more than a year, but Winer's Google Trend search shows that it's been on fire since January.

Let's take a closer look at the iPhone chart, below the fold.

You can see right away why it's so hard for Apple's competitors to be heard above the din. Those spikes (A, B, C, etc.) marked by randomly chosen news articles are triumphs of event marketing orchestrated by Steve Jobs and amplified by the writers — including this one — who follow his every move.

The timing of most of those spikes are self-explanatory. June 29, 2007 was the day the first-generation iPhone launched. Sept. 6 marked the day Apple lowered the price. The iPhone 3G went on sale on July 11, 2008.

But even adversity plays into Apple's hand. The iPhone was first unveiled on Jan. 9, 2007, but interest in the device spiked two days later, when Cisco (CSCO) sued Apple for over the iPhone trademark (the two companies eventually settled out of court).

How can RIM, Palm and the rest compete? The launches of the BlackBerry Storm and the Palm Pre barely register on the chart. In fact, the Palm trend line is almost certainly inflated by searches related to "palm trees," especially in cities with a lot of them, like Miami, Los Angeles and Irvine (see red "Palm" bar in the chart detail inset).

It remains to be seen whether Apple can continue to dominate the buzz with Steve Jobs out of the picture, at least temporarily. In the Google Trends chart comparing "Steve Jobs" and "Bill Gates," the two computer celebrities switch places several times over the years. Steve Jobs searches shot up when his health problems were in the news, but since he took his medical leave, the two lines have crossed and now Gates is back on top. See here.

How big is the buzz around Apple's (AAPL) forthcoming iPhone?

Here's one way to gauge it: track keyword searches using Google's cool Trends tool, available here. With this free widget you can enter one or a series of search terms and instantly get a sense of how often they are invoked over time.

For example, a simple request for the graph of searches on Google (GOOG) for "3g iphone" over the past 12 months yields the fever chart below (subscribers click here):

Note the gradual rise in interest as Steve Jobs' June 9 keynote approaches, which is not surprising. What is surprising is the fall-off in "News reference volume" in the bottom graph, a decline that seems genuine and not an artifact of Google's data collection methodology. (There is no similar fall-off in, for example, Barack Obama searches.) This suggests that, although interest continues to grow among the Google-searching public, the tech press may have developed a case of 3G fatigue.

Google Trends also shows you where these searches are coming from. Here's that data for the chart above:

Check out the size of that Hong Kong bar! How is it that an island with less than 1/40 the population of the United States generates three times as many hits? [Correction: Google is showing something more like searches per capita; see here. Still, there seems to be a lot of interest in the 3G iPhone in Hong Kong.] Let's zero in on Hong Kong's 3G iPhone searches:

This shows a sharp rise in searches that began in the middle of May, even before last week's announcement that Hutchison Telecommunications would be bringing the iPhone to Hong Kong and Macau.

Here's one final chart to put things in perspective. It maps 3G iPhone searches against RIM's (RIMM) BlackBerry and simple iPhone searches, without 3G.

Note that despite the recent uptick in searches for 3G iPhone, they don't rise to the level of BlackBerry searches. Moreover, neither can come close to the buzz for the original iPhone, especially when the device was launched last June.

There's lots of data to be gleaned by tracking Google Trends. If you find something particularly noteworthy or surprising, take a snapshot and post it in the comment stream.