Drought will have little impact on California economy, says Moody's

The credit rating agency Moody's said last week that California's drought would have little economic impact on the state in the short term.

"We do not expect the drought to weigh heavily on California’s credit position unless the drought lasts significantly longer than our 12-18 month forecast period," the report says. "While the state's agricultural industry has national importance, it represents a very modest portion of the state's gross product and employment."

Investors rely on Moody’s to gauge the financial health of cities and states. The agency found that even though California produces nearly half of U.S.-grown fruits, nuts and vegetables – agriculture only represents a tiny part of the state’s huge overall economy.

"Of California's total 2013 GDP of almost $2 trillion, just $28 billion, or 1.4 percent, came from agriculture," the report says. "The very small share of GDP that comes from agriculture is not due to any impact from the drought: The share of GDP coming from agriculture has ranged from 1.0 percent to 1.4 percent for more than 15 years."

By comparison, the financial sector, which include banking and insurance, account for 36 percent of the state's GDP. Manufacturing accounts for about 12 percent, according to the governor's office. 

If the drought lasts longer than 12-18 months, Moody's says municipalities heavily dependent on agriculture – mostly in the Central Valley – could be adversely affected.

"For these local governments, their economies/tax bases, which represents 30 percent of our baseline credit assessment of a local government, will in time show the effects of the lost agricultural employment and land value, if they haven't already, the report says. "This will put downward credit pressure on these local governments."