Legislative Analyst Report Notes Drought Has Limited Statewide Economic Impact

The state Legislative Analyst’s Office (LAO) this week said the drought will have a limited statewide economic impact.

“While the drought is affecting many Californians and communities in different ways, we currently do not expect the drought to have a significant effect on statewide economic activity or state government revenues,” the LAO said in its April 14 report.

“The national press is falsely sounding the alarm that our state’s economy is falling apart,” said California Chamber of Commerce President and CEO Allan Zaremberg. “While the drought is a serious issue, its current impact is mostly limited to agriculture, and California is definitely still open for business. The administration and local water districts are managing our scarce resource, and the LAO report will help national businesses understand that our lack of precipitation is not a barrier to expanding their operations.”

Limited Statewide Impact

The drought will have a limited statewide impact because agriculture directly generates only about 2% of total state gross domestic product (GDP) and 3% to 4% of all jobs in the state, the LAO report stated.

The report acknowledged that local communities with “economies heavily concentrated in particular aspects of agriculture could be heavily affected,” and some communities already have been heavily affected.

The drought could force farmers to fallow more fields or switch to different crops or livestock either temporarily or permanently, the LAO report noted. The switches could be to lower-value crops or livestock in some cases, higher-value crops in other instances.

Even a substantial decline in agriculture’s share of the economy, such as occurred during and after the 1976–1977 drought, probably would have only a limited impact on the state’s overall economy, the LAO said, pointing out that real state GDP rose during 1976 and 1977.

Residential Water

The residential water changes are “notable, but not likely a major drag” on the economy, the LAO said.

The Governor has ordered a mandatory 25% water use reduction in urban areas, including restrictions on water use by golf courses and other large landscaped areas, plus a prohibition on sprinkler usage in new homes unless water-efficient drip irrigation is used.

These noticeable changes “seem unlikely in and of themselves to result in a significant drag on the state’s economy,” the LAO said, pointing out that California homebuilders already are required to meet water efficiency and other requirements.

Landscaping and other aspects of residential and commercial construction in some communities seem likely to change if the new restrictions are finalized and stay in place, the LAO said.

“Still, homebuilding and other construction continues in the state, and there is no broad change in overall consumer spending or sentiment at this time resulting from the drought,” the report concludes.

The LAO report, “Limited Statewide Economic Impact of Drought,” is available at www.lao.ca.gov.

Staff Contact: Valerie Nera

Valerie Nera specializes in advocacy on agriculture, water, resources, crime, and banking and finance issues for the CalChamber. She joined the CalChamber staff in 1978 as a legislative assistant on agricultural issues. She also has lobbied air, environmental and privacy issues for the CalChamber. She earned a B.A. with honors from the University of California, Berkeley, and a J.D. from the McGeorge School of Law, University of the Pacific. See full bio.