’ s district could be the most diverse in the system : ranging from the urban density of new york city to the forested sparseness of the northern adirondacks, to here in the caribbean island of puerto rico. all in all, there is a lot to keep my colleagues and me quite busy – even in normal times. u. s. economic outlook now, what is the outlook for economic activity, employment and inflation on the mainland? in particular, what are the areas of vulnerability that we should be most concerned about? i am pleased to say that the economic outlook for the mainland has improved in the past six months. despite this, we are still very far away from achieving our dual mandate of maximum sustainable employment and price stability. faster progress toward these objectives would be very welcome. on the activity side, a wide range of indicators show a broadening and strengthening of demand by households and production by firms. for example, on the demand side, after an unusually deep retrenchment during the recession, consumer spending has begun to recover, and that recovery strengthened considerably in the final months of 2010. not surprisingly, businesses ’ orders and production are following suit. these factors led to a 3. 1 percent growth rate in our most comprehensive measure of national output ( real, or inflation - adjusted, gross domestic product or gdp ) in the fourth quarter of 2010. growth for the first quarter looks likely to be similar, near 3 percent. in my view, the revival in demand and production – while not as strong as desired – suggests that we may be much closer to establishing a virtuous circle that will support stronger growth. what i have in mind is a cycle in which rising household and business demand generate more rapid income and employment growth, which in turn bolsters confidence and leads to further increases in spending. this is why we upgraded our assessment of the economy at last month ’ s fomc meeting, noting the economy is now on a “ firmer footing ”. the major missing piece of the puzzle has been the absence of strong payroll job growth. we will need to see sustained strong employment growth in order to be certain that this virtuous circle has become firmly established. with respect to the labor market, we have seen some conflicting signals. on one hand, the unemployment rate has fallen sharply over the past four months, dropping to 8. 8 percent from 9. 8 percent in november. on the other hand, payroll employment gains have been relatively modest. the good news

i expanded the set of economies for which we estimated r - star. 9 indeed, before the pandemic, historically low estimates of r - star characterized advanced economies across the globe. this is illustrated by the holston - laubach - williams ( hlw ) estimates of r - star for the united states and the euro area using data through 2019, shown in figure 1. both were around ½ percent before the onset of the pandemic, far lower than estimates from preceding decades. back to the future one of the features of the lw and hlw models is that both are designed to be flexible and to " let the data speak " in measuring changes in the natural rate of interest. even this flexibility, however, has its limits. and the economic turmoil brought on by the covid - 19 pandemic went far beyond what the models were originally designed for. in particular, the pandemic violated two key assumptions about the nature of macroeconomic disturbances underlying the models. 10 first, the kalman filter statistical method that serves as the models'workhorse assumes random disturbances to the economy follow a normal, or bell - shaped, distribution. relative to historical experience, covid - 19 represented an extremely rare tail event in terms of its effect on the economy. second, the models assume that these disturbances are serially uncorrelated, which is at odds with the sequence of shutdowns and reopenings associated with covid - 19. the highly unusual nature of the effects of covid - 19 is illustrated by the model auxiliary residuals for the output gap, shown for the united states and the euro area, in figure 2. these residuals are related to the difference between the data and the model's prediction for the data. the dashed lines in the figure indicate two standard deviations. for the united states, these residuals are as large as 15 standard deviations, and for the euro area, they exceed 20 standard deviations in some periods. in a purely statistical sense, the probability of such an event occurring even once, much less twice, is infinitesimally small. after the onset of the pandemic, we suspended publication of r - star estimates due to this extreme economic volatility and the elevated uncertainty about how the pandemic would evolve. the relaunch i am pleased to report that starting today, we are relaunching regular publication of the lw and hlw estimates of r - star