California Sliding Into Recession?

I had previous considered California as high-risker risk lending terrain due to housing conditions there. Calculated Risk has highlighted another reason to be careful:

Based on sales tax revenue, it now appears that the California economy is in recession.

The graph shows the September retail sales tax collections (and fiscal year through Sept) since 1998. The large decline in 2001 was related to the '01 recession, the tech bust, and 9/11.
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September sales tax revenue was off 7% compared with last year.

I've seen a couple things that imply an inverse relationship between economic activity and default rates (another post for another time). In other words, when economics slow down, default rates go up. Most of the papers were correlating to the US GDP, but I'm expecting some affect will be seen on the state level. Even if California isn't slipping into a recession, this is a definite economic slowdown for the state.

I could be wrong, but it's taking a big risk to bet on California default rates not increasing. Therefore, I'm curtailing my lending in California. When I do lend, I'll be adding 1% - 2% to my minimum bid to cover the increased default risk. It may take longer to get loans funded, but I like the alternatives less.

Update: I saw on Yahoo financial news that, nation wide, retail sales were up in September. For California to see a 7% decline in sales tax revenue while the nation was up in overall retails sales is not a good indicator for California. From the article:

Retail sales posted a stronger-than-expected gain and prices at the wholesale level jumped up significantly in September.

The Commerce Department reported Friday that retail sales increased 0.6 percent last month, compared to August, as a big increase in auto sales helped offset weak demand for clothing. The increase was double the gain that economists had been expecting and was also in contrast to reports Thursday of sluggish demand from the nation's leading retail chains
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Outside of autos and gasoline, areas of strength included sales at grocery stores and electronics and appliance stores. Areas of weakness last month included department stores, down 0.5 percent; clothing stores, down 0.4 percent and furniture stores, down 0.6 percent. Furniture store sales have been hurt by the steep slump in home sales.

Update 2: California is also the loan leader by a significant margin, so this has implications for the Prosper marketplace in general.