LOS ANGELES — Though California's drought is significant for the state's agricultural industry, the impact appears marginal for the state's larger economy, according to two new economic reports.
In its March economic outlook on the state, Wells Fargo economists said while the Golden State's drought is making "big headlines nationwide, it is not at all visible from the economic data."
"In terms of the overall economy, it is not going to have a major impact on California in terms of income growth and job growth," said Mark Vitner, a Wells Fargo Securities Senior Economist, during a question-and-answer period following a conference call Wednesday.
The anticipated loss of economic growth from the California drought is between two-tenths and a half a percentage point, Vitner said.
California's economy continues to grow at a pace slightly ahead of the nation's, although the gains have been heavily-weighted toward the state's larger metropolitan areas along the coast, Vitner said.
California's unemployment rate fell 1.4% in 2013, ending the year at 8.3%, according to the Wells Fargo report.
The state is still outperforming the nation in job growth, Vitner said. The only part of California that did not experience a significant decline in unemployment in 2013 is Imperial County, but that county has traditionally had one of the highest unemployment rates in the country, he said.
The UCLA Anderson Forecast conducted a statistical analysis of droughts and employment in California from 1969 to 2012 and found there was no relationship between drought and growth rates, Jerry Nickelsburg, a senior economist with the forecast, wrote in the Anderson forecast report released Wednesday.
Rainfall for the year is about 26% of what was expected, which means a higher probability of mudslides and fire, said Michael Wolf, the other Wells Fargo economist on the conference call.
Aside from the increased likelihood of natural disaster, the impact of drought on arid states that frequently experience such conditions is less, Nickelsburg said.
"The fact is, aridity and recurrent drought, if expected or normal, are not a detriment to economic growth," Nickelsburg said in his report. "Arid states in the U.S. have not performed worse than their wetter brethren."
Following major droughts, impacted industries and households tend to adapt, he said.
For instance, Nickelsburg said that following the state's 1976-1977 drought widespread use of drip irrigation in agriculture and conservation in household use became, and remains, common in California.
As a result, California does not even make the top 12 states in the volume of freshwater for industrial usage, according to Nickelsburg. Households also have responded by planting drought resistant plants and installing low-flow appliances. The amount of water used in Southern California is no greater today than it was 20 years ago when the population was much smaller, he said.
Northern California is much more severely impacted by the drought than Southern California, because the southern segment of the state has invested in storage, Vitner said.
"There isn't the urgency in Southern California that there is in Northern California," Vitner said.
Nickelsburg also took Gov. Jerry Brown's and the federal government's actions into account in reaching his conclusions.
Recently passed state legislation program allocates $678 million in state funds as transfer payments. These funds will come from the rainy day fund, previously authorized bond issue and a small amount of pollution tax money, according to Nickelsburg.
"In other words, a large transfer of income will be injected into the California economy," he said.
The bulk of the transfers will be for water conservation and water treatment infrastructure with a smaller portion of the funds going for emergency grants to farm workers put out of work by the reduction in planted acreage.
President Barack Obama has promised $165 million in additional aid of the state to be allocated between farm owners, idled farm workers and water conservation infrastructure.
If all of the funds are approved, it will infuse $847 million into the California economy. The funding should cut in half the impacts on agriculture where the greatest harm is anticipated, Nickelsburg said.
Reports from University of California-Davis and the California Farm Water Coalition estimate agricultural losses between $657 million and $2.2 billion. Using the higher Farm Water Coalition numbers, direct losses will be $1.3 billion, which Nickelsburg said is less than 1% of total California gross state product.
"All of this cumulative evidence suggests while the drought is real, and it will cause economic losses, particularly in certain agricultural quarters, overall the state is not likely to be greatly impacted," Nickelsburg said.
Nickelsburg did caution that if the drought ends up being even worse than current conditions suggest or lasts for several year, or general economic conditions worse, it could alter the state's economic picture.
The Anderson forecast is lowering its economic forecast for the Golden State by 0.2% for the next few years as a result of the drought impacts, however.
