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Cliff had yet to emerge) and the slowing of growth of our trading partners. For exactly the same reasons we temper our forecast for employment growth in 2013. The Fiscal Cliff Part I is over with and we have perhaps finished with Part II, but like so many Hollywood Movies (and Federal Reserve QE's) the sequel to the Fiscal Cliff only awaits the critics' reviews. In addition we factor into our view for 2013 the adjustment in California to the implementation of Prop 30 taxes. As we argued in the last California Report, these are apt to be minor, but they will represent some slowing in California growth rates compared to the U.S.

CALIFORNIA COMPETITIVENESS

Much has been made of California's competitiveness in the world economy. Since one of the drivers of employment in the recovery has been world trade, and California is dependent on it to resume a more robust generation of jobs, it is worthwhile to ask the question: Is California losing its edge? Indeed, Governor Perry, California's favorite tourist, has come to the Golden State a number of times asking this question. This, it turns out, is a difficult question. How do we measure "edge?" If we rely on data to tell us what has actually happened, then the ports are the logical place to look.

Over the course of the recovery in California, the volume of exports through the seaports has grown. From the depths of the recession there was steady growth in sea borne traffic and by early 2011 the recovery was complete. Since then there has been no discernable growth at the seaports. The same tendency has been seen in the data on high valued exports through SFO and LAX. These data correspond to the recessions in Europe and Japan and the "growth recession" in China and cannot be taken as evidence of a loss of competitiveness.

There are two issues in using these data to ascertain whether California has lost its edge in the production of goods. The first is that the metrics for exports (TEUs for seaports and Tons for airports) is a measure of volume and weight and not of value. The second is that the exports are goods that flow through California's ports, but are not a measure of goods that originate within California. For example, manufactured goods from Henderson, NV on the way to China would naturally find their way out of the U.S. through California.

Though the same critique of origin may be applied to the value of goods exported through California's airports and seaports, the ability to sort those goods by destination gives a clue to the competitiveness of California's goods. As a country grows, it will demand more of most all goods including those it imports. If the demand for those imports grows faster than domestic income, then in some real sense, the imports are deemed to be better goods, and are therefore competitive goods. Looking at the growth in GDP and the growth in imports from California ports for the top 30 destinations we find that in general, California port of embarkation goods are competitive. That is, the value of the goods exported is growing at approximately the same rate, or at a higher rate, than the GDP of the destination country.

Since some of the destination countries are Pacific Rim countries, the analysis combines exports that are going through California ports simply because of geography with those that are originating in California. If we remove all of those Pacific Rim countries, we solve most, though not all, of the problem. That is, agricultural products from the Mid-West headed for China might flow through the Port of Oakland, but those destined for Russia or Germany would be shipped to the East.

THE FORECAST

The Fiscal Cliff Parts I and II, Prop. 30 and the slowdown in exports were all figured into the California forecast in December. Therefore, the outlook for 2013 and 2014 is not radically different than before and has only been moderately adjusted to reflect the most current data. Even though the fourth quarter showed weaker growth in employment in California than in the U.S., we don't believe that is a sign of impeding further California specific weakness in 2013. Indeed, the preliminary indications are that the benchmark revisions to California's employment levels will result in higher than current estimates.

The factors which have driven California employment and income growth to higher rates than the U.S. are still in play. As the world economy improves, and as investment in the U.S. picks up once again, California will once again have a disproportionate share of that improvement. Our expectation is for this to occur in 2014 and to accelerate in 2015.

Our forecast for 2013 is for total employment growth (payroll, farm and self employed) of 1.6% and for 2014 and 2015 it is 2.2% and 2.3% respectively. Non-farm payroll employment will grow more slowly, at 1.4% and 2.1% and 2.3% for the three forecast years. Real personal income growth is forecast to be 1.4% in 2013 followed by 3.6% and 3.3%% in 2014 and 2015. Unemployment will fall through 2013 and will average approximately 9.6% for this year. In 2014 we expect the unemployment rate to drop to 8.4% on average, a percent higher than our U.S. forecast and thence to 7.2%.