The Southeastern United States experiences recurring hydrological droughts, which can reduce water availability and result in water deficits. Long‐term monitoring data from Panola Mountain Research Watershed, a small, forested, seasonally water‐limited watershed near Atlanta, GA, was used to quantify interactions of climatic variability with shallow and deep storage and evapotranspiration. Watershed storage (WS) and actual evapotranspiration (AET) were estimated monthly from 1985 through 2015 using a relationship with baseflow and a water‐budget approach, respectively. A watershed shallow storage (SS) water budget, based on soil moisture profile data, indicated a transition from recharge to surplus as dormant season SS increased to field capacity, and a transition from utilization of stored water to water deficits as growing season SS declined toward its wilting point. Deeper storage appeared unavailable to AET during dry conditions. The majority of deeper storage recharge occurred during the dormant season and required SS to be near field capacity. WS was an effective drought indicator. Growing season droughts typically occurred when WS was below normal at the end of the dormant season and growing season precipitation (P) was below or near normal. A hydrologic persistence analysis showed that monthly month‐standardized WS was significantly correlated (p‐value < 0.05) with past monthly month‐standardized WS for the previous 19 months and with past monthly P for the previous 11 months, indicating the importance of past hydrologic conditions on WS. These findings allowed assessment of expected climatic changes on the water cycle, which included effects on future recharge, water deficits, and drought occurrence.