Could California Drought Hurt U.S. Economy?

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California has come back from the Great Recession that drove its unemployment to one of the highest among the states. Buoyed by the rise of new technology companies and a modest recovery of its agricultural industry, its unemployment level has fallen to 8.3%. That is not nearly as low as the national rate of 6.7%, but it is a strong rebound since the figure was in double digits. Now a drought could set back much of the recovery of a state, which would be the eighth large economy in the world based on gross domestic product (GDP) if it were an independent nation.

California has a GDP of $2 trillion, a huge part of the U.S. GDP of more than $15 trillion. As astonishing as it may seem, the source of water in the state that provides for millions of people will be cut off as the California Water Project cuts all supply to vast regions of the state:

Planned, designed, constructed and now operated and maintained by the California Department of Water Resources, this unique facility provides water supplies for 25 million Californians and 750,000 acres of irrigated farmland.

As of now:

“The harsh weather leaves us little choice,” said DWR Director Mark Cowin. “If we are to have any hope of coping with continued dry weather and balancing multiple needs, we must act now to preserve what water remains in our reservoirs.”

California has 38 million residents, approximately 12% of the U.S. total.

Among the worst hit areas are those most ravaged by the recession — the cities inland from the Pacific Coast. Most rely heavily on agriculture.

It is very clear that the California economy may slow significantly if the drought persists for months. What is not as clear is the ripple effect is will have on the nation as business and personal consumption are undermined further and further. Unemployment almost certainly will rise again, and some companies may have to close down altogether. Home prices in the hardest hit regions will almost certainly fall.

From time to time, natural disasters in the United States, from cold weather to hurricanes, are measure by the effect they will have on GDP in the quarter in which they occur. But most are local or, if national, short-lived.

With 13% of U.S. GDP based in California, a tremendous shock to its system will ripple across balance of America’s economy.