While I don't particularly trust Google all that much anymore, the fact that ISPs even have an opinion on this is a smoking gun that they're doing sketchy things with DNS data. There is no actual technical reason why they should care if you use their DNS servers or something else, even a private, encrypted DNS service.
They definitely are. I know for a fact that they are running massive Hadoop clusters storing information on DNS records involved in their customer traffic. If I recall correctly they mirror a lot of the traffic to analytics environments.
And that's why I use VPN services. But the same is true for VPN services, regarding US and/or other TLAs. So I use nested VPN chains, to make it harder to get complete data.
And when it really matters, I add Tor to the mix. Even if it's heavily infiltrated by US TLAs, there's at least the chance that it's also heavily infiltrated by TLAs of US adversaries. So, Dog willing, maybe they cancel each other out, at least somewhat.