The deserts of the Southwest US are experiencing an unprecedented, prolonged drought that has induced high, localized shrub mortality. 2004/2005 hydrological-year precipitation was augmented by an El Nino/Southern Oscillation (ENSO) event, which facilitated some vegetative recovery, often in the form of exceptional annual plant productivity under desert shrubs. We investigated whether high annual productivity competitively affected recovering shrub functional ecology by establishing the relationships of annual and shrub biomass production with carbon isotope ratios, pre-dawn water potentials, and foliar N content of two dominant Mojave Desert shrubs, Larrea tridentata and Ambrosia dumosa. For Larrea, carbon isotope ratios significantly increased with increasing annual biomass, suggesting water use by the annual community induced prolonged stomatal closure. In Ambrosia this relationship was reversed, indicating both annuals and shrubs benefited from abundant soil water; this was confirmed by experiments showing pre-dawn water potentials in Ambrosia were unaffected by annual removal manipulations in an area where we previously found annuals to negatively effect shrub water status. Shrub leaf N showed insignificant, weak negative correlations with associated annual productivity. Based on biomass production, the previous season’s negative effects of annuals were still present in Larrea in the following dry year when annuals were lacking. We conclude that in exceptional years, annuals can have negative effects on the performance of at least some shrubs, possibly due to above-ground interception and depletion in the shallow rhizosphere of annuals, and may be especially significant during recovery following prolonged drought.