Springtime bud-break and shoot development induces substantial carbon (C) costs in trees. Drought stress during shoot development can impede C uptake and translocation. This is therefore a channel through which water shortage can lead to restricted shoot expansion and physiological capacity, which in turn may impact annual canopy C uptake. We studied effects of drought and re-hydration on early season shoot development, C uptake and partitioning in five individual 10-year old Picea mariana [black spruce] trees to identify and quantify dynamics of key morphological/physiological processes. Trees were subjected to one of two treatments: (i) well-watered control or (ii) drought and rehydration. We monitored changes in morphological [shoot volume, leaf mass area (LMA)], biochemical [osmolality, non-structural carbohydrates (NSC)] and physiological [rates of respiration (Rd) and light-saturated photosynthesis (Asat)] processes during shoot development. Further, to study functional compartmentalization and use of new assimilates, we 13C-pulse labeled shoots at multiple development stages, and measured isotopic signatures of leaf respiration, NSC pools and structural biomass. Shoot water potential dropped to a minimum of −2.5 MPa in shoots on the droughted trees. Development of the photosynthetic apparatus was delayed, as shoots on well-watered trees broke-even 14 days prior to shoots from trees exposed to water deficit. Rd decreased with shoot maturation as growth respiration declined, and was lower in shoots exposed to drought. We found that shoot development was delayed by drought, and while rehydration resulted in recovery of Asat to similar levels as shoots on the well-watered trees, shoot volume remained lower. Water deficit during shoot expansion resulted in longer, yet more compact (i.e., with greater LMA) shoots with greater needle osmolality. The 12C:13C isotopic patterns indicated that internal C partitioning and use was dependent on foliar developmental and hydration status. Shoots on drought-stressed trees prioritized allocating newly fixed C to respiration over structural components. In conclusion, temporary water deficit delayed new shoot development and resulted in greater LMA in black spruce. Since evergreen species such as black spruce retain active foliage for multiple years, impacts of early season drought on net primary productivity could be carried forward into subsequent years.