Testing EPB's Cyclical GDP Framework: Building Our Own Indexes

Eric Basmajian at EPB Research makes a bold claim: only 3 components of GDP—durable goods consumption, residential investment, and business equipment investment—drive 100% of recessions. The other 80% of the economy "almost never contracts." We're going to build our own indexes from Federal Reserve data to test whether this framework actually holds up, measure the lead times, and see if we can reproduce the charts from their December 2025 article.

What We're Testing

In our previous article, we tested EPB's Four Economy Framework using employment and production data. That article focused on the sequence—Leading → Cyclical → Aggregate → Lagging. This article digs into a different angle: the GDP composition approach.

On December 3, 2025, EPB Research published "The 20% of the Economy That Drives 100% of Recessions." The core argument:

This is a testable hypothesis. We're going to:

• Download the exact GDP components from FRED (Federal Reserve Economic Data)
• Construct our own "Cyclical GDP" and "Non-Cyclical GDP" indexes
• Measure contraction frequencies to verify the 21% vs. 3.8% claim
• Test whether Cyclical GDP's share of total GDP actually leads recessions
• Compare growth rates during recessions vs. expansions
• Reproduce the key charts from EPB's article using our own data

Why test this? We want to verify that these findings can be replicated using publicly available data. If the framework is sound, it should be reproducible with Federal Reserve data. This kind of independent verification is how economic frameworks gain credibility—not through assertion, but through replication.

Data Sources and Methodology

Test 1: Do Cyclical Components Actually Contract More Often?

EPB's key claim: Cyclical GDP contracts in 21% of quarters since 1960. Non-Cyclical GDP contracts in only 3.8% of quarters. Let's verify this with our own data.

Test 2: Growth Rates During Recessions vs. Expansions

EPB claims: During expansions, Cyclical GDP grows at 8.0% nominal (including inflation). During recessions, it contracts at -5.2%. Non-Cyclical GDP grows at 6.6% during expansions and still grows at 6.2% during recessions. Let's test this.

Test 3: Cyclical Share as a Leading Indicator

EPB's main predictive claim: when Cyclical GDP as a percentage of total GDP starts declining, that signals an approaching recession. Let's plot this and measure lead times.

Test 4: Breaking Down the Three Components

EPB emphasizes that not all recessions see all three components decline simultaneously. Sometimes weakness concentrates in one area (e.g., equipment in 2001) while others stay strong (residential in 2001). Let's chart the three components separately.

Test 5: The 2022-2025 Case—Why No Recession?

EPB's December 2025 article specifically addresses why the economy avoided recession despite Fed tightening from 0% to 5.5%. Their explanation: equipment investment surged (AI capex + transportation catch-up from pandemic disruptions), offsetting weakness elsewhere. Let's verify this with our data.

Why This Framework Matters

If EPB's Cyclical GDP framework is correct, it solves a major problem in recession forecasting: where to look. Most analysts track everything—total GDP, total employment, total consumption. But if 80% of the economy almost never contracts, tracking aggregates creates noise, not signal.

The Cyclical GDP approach is essentially a filter: ignore the stable parts, focus on the volatile parts. It's the GDP equivalent of our previous finding that construction and manufacturing employment (15% of jobs) drive recessions despite being small, because they swing ±20% while services (70% of jobs) barely move.

Limitations and Questions