The Southeastern United States experiences recurring hydrological droughts, which can reduce water availability and can result in water-limiting conditions. Long-term monitoring at Panola Mountain Research Watershed, a small, forested, seasonally water-limited watershed near Atlanta, Georgia, was used to quantify the 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 water-budget approach combined with a WS-baseflow relationship. Shallow storage (SS) was assessed from a soil moisture profile. Soil moisture transitioned from recharge to surplus as SS increased from its field capacity to a nearly saturated state during the dormant season, and transitioned from utilization to climatic water deficits as SS declined from its field capacity to its wilting point during the growing season. Deeper storage was unavailable to AET during dry conditions. The majority of deeper storage recharge occurred during the dormant season and required SS to be wet. 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 found that monthly-standardized WS was significantly correlated (p-value <0.05) with past monthly-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. Expected climatic changes affected recharge during the dormant season and deficits during the growing season.