Wells Fargo Securities said California's labor market has shown some encouraging signs of improvement over the past three months, though job creation for much of the year has been a hit-or-miss venture.

California non-farm payrolls have increased at a moderate pace for three consecutive months now through October. According to the state's Department of Labor, California added a net 25,700 jobs in October, and the September jobs data were revised higher to a solid 39,200 gain.

The state's employment has increased by 192,900 jobs since the start of the year, which is good enough to push California's jobs performance over the past 12 months to 1.7 percent growth, well above the national average of 1.2 percent.

Over the past year, nine of the state's 11 major industries have created net jobs led by large percentage gains in information, professional & business services, construction, health care and leisure & hospitality.

Wells Fargo Securities' economist Scott Anderson said that only two sectors, finance and other services had shed net jobs over the past 12 months in California.

Of the state's 11 major industries, seven continued to create net jobs in October, including, importantly, construction, information, finance, education and health care, leisure and hospitality and professional and business services. But four categories are now losing net jobs, including manufacturing, trade, transportation, mining and utilities and government.

The deterioration in manufacturing, transportation and trade jobs may suggest that the economic recovery the state has enjoyed over the past year could be about to downshift as global growth slows and the risks of financial contagion from Europe intensify.

But even as California's labor market begins to founder, the performance so far this year has been somewhat stronger than we forecast back in the March 2011 California Outlook. We now expect the state to manage employment growth in 2011 of around 1.4 percent, slipping to 0.8 percent in 2012, said Anderson.

Anderson said the outlook for next year remains very much in flux. With the possibility of another U.S. economic recession remaining uncomfortably high, there's an even higher probability that California's economic recovery could stumble next year. The downside risks are easy to list.

Slower growth in Asia and a stronger dollar will hurt California exports and tech demand. A foreclosure and distressed sales backlog and continued weak demand for housing will keep home prices declining, intensifying financial pressures on California consumers at a time when equity prices could also be moving lower.

More state budget cuts are likely as state revenues are expected to fall $3.7 billion below government projections for 2011-12, according to the Legislative Analyst Office. New state budget cuts could start in January and could range between $600 million to more than $2 billion.

For now, Anderson withholds judgment on the California recession question and continues to forecast net jobs creation in California, though it's likely to be fewer jobs created than this year, and the pace of job growth in California could slip somewhat below the national average.

Anderson expects the U.S. economy to avoid another recession over the next two quarters, though growth may prove too slow to keep the unemployment rate from rising.

Anderson said the lack of new jobs is expected to begin pushing California's unemployment back toward 12 percent in the quarters ahead. In October, California's unemployment rate decreased to 11.7 percent from 11.9 percent in September. The state's unemployment rate peaked at 12.5 percent in October 2010.

Anderson said the most recent downside risk to the California outlook is the potential for slower business investment and export growth next year.

Several important Asian and European trading partners are seeing slower economic growth than they've seen since the global economic recovery began. China, Japan, South Korea, Singapore and Taiwan, are all seeing slower production and export growth as the global economy begins to feel the tightening of financial conditions and the start of another recession in Europe.

This could hurt pockets of strength in San Jose and the Bay Area, agriculture exports from the Central Valley, and the wholesale trade and transportation sectors in southern California, said Anderson.