Carriers in all modes stand ready to hike rates. Unfortunately for logistics managers, they appear to have the ammunition they need to shoot down any attempts to cut a better deal.

Motor carriers, for example, will justify their demands for higher rates by pointing to the federal government's new hours-of-service regulations for drivers, which are expected to significantly raise carriers' costs. New emissions standards, meanwhile, are causing prices for truck and locomotive engines to shift into high gear.

On the demand side, both truckers and railroads saw higher freight volumes in late 2003. Sailing around pricing hazards could be tough for ocean shippers, too, as demand for space outstrips supply on some trade lanes.

Add to this mix a positive outlook for the U.S. economy, and the factors are in place for a challenging year ahead for shippers. Just how challenging will depend on the path the economy takes in the next few months.

At the moment, most economists have an upbeat view of the economy's direction. According to a survey of 50 top forecasters in the November 2003 issue of Kansas City, Mo.-based Blue Chip Economic Indicators, the U.S. gross domestic product (GDP) will grow by 4.2 percent in 2004. That's up from the 3.5-percent growth rate that the Blue Chip panelists had predicted just six months earlier.

"The first half of 2003 saw a lot of doom and gloom from the Blue Chip panel but the second half turned out to be stronger than expected, and now the consensus is bullish about 2004," says Randell E. Moore, executive editor. "GDP gains looking ahead are predicated on easy monetary and fiscal policy, and patience. It takes a while for people's expectations to improve."

With those policies likely to continue in the coming year, economic growth seems assured. The federal funds rate at the end of 2004 is expected to hit anywhere from a high of 2.51 percent to a low of 1.1 percent. Just under half of the economists on the Blue Chip panel, moreover, believe the Federal Reserve Board won't raise interest rates at all before July.

Consumer trends are tougher to call. Blue Chip panel members say they blew their forecast for GDP in the third quarter of 2003 because they underestimated the propensity of consumers to spend rather than save additional income from President Bush's tax cuts. "In early July, the consensus forecast a 3.6-percent growth rate in real [inflation-adjusted] GDP for the third quarter," says Moore. "Of course, it turned out to be 7.2 percent, double the early July forecast."

That growth spike represented the fastest gain in 19 years. Maury N. Harris, an economist for UBS Warburg in New York City, notes that an estimated $26 billion was added to consumers' wallets during the third quarter. At the same time, several measures of consumer and business confidence were on the rise. "Insofar as households and firms base their behavior on their confidence, there can be simultaneous and self-reinforcing spending effects," he observes.

Although consumer spending is playing a role in the rebound, the most significant factor affecting truck rates this year will be the level of business investment in equipment and inventories. On average, the Blue Chip panel members forecast that non-residential fixed investment will rise by 9.3 percent. Economists at Eaton Corporation and General Motors were even more optimistic, predicting growth of 10.7 percent and 10.2 percent, respectively. That would be a significant improvement from the estimated 2.4-percent gain in business investment for 2003. And it would be a downright spectacular turnaround from the 5.7-percent and 5.2-percent declines seen in 2002 and 2001.

GDP, interest rates, confidence, and investment are all useful macroeconomic signposts for future economic activity. But any look at the economy's impact on transportation rates must also read the tea leaves for inventories and international trade. The former has a big impact on demand for trucking services, while the latter steers air and water transportation markets.

In regard to inventories, "businesses were caught flat-footed in 2003," says Moore. Manufacturers' inventories contracted for six consecutive months in mid-2003 to reach the lowest levels since 1996. With significant growth ahead, Moore cautions, "companies must get inventories more in line with growing demand."

As for trade, Asia continues to display a voracious appetite for raw materials from North America, and continued growth in the region seems assured. Japan's economy has grown for six consecutive quarters, while South Korea's is forecast to grow by 5.3 percent in 2004. China's GDP is expected to surge by 8.5 percent, according to consensus forecasts. That could be an underestimate, though. "My reading of the data suggests that China's economy could grow 12 percent and, in fact, may be in danger of overheating," Moore suggests.

By all of those measures, it's apparent that pressure is building on transportation rates. Consider, for example, the situation in the trucking industry. That sector has pushed price increases of 3 to 4 percent for a couple of years running without any meaningful additions to capacity, observes transportation analyst Donald Broughton of A.G. Edwards & Sons in St. Louis.

"Usually, the trucking industry is perfectly capable of increasing capacity enough to bring rates back down, but that hasn't been the case for a couple of years," Broughton says, citing an extraordinary number of failures in the truckload market. "The high failure rate means the patient was sick, but I think the fever has broken."

Adds Thomas S. Albrecht, managing director of BB&T Capital Markets in Richmond, Va.: "For the first time since deregulation in 1980, truckload rates may show meaningful improvement early in the cycle, which implies that rates could be strong for a prolonged period."

A 2.5-percent rate hike in the first quarter of 2003, followed by price pickups of 2.9 percent and 2.8 percent in the second and third quarters, respectively, provide support for Albrecht's thesis. He expects truckload pricing trends will continue to be more favorable for larger carriers than for smaller ones. Freight volumes, meanwhile, have been strongest in Western states and weakest in the Southeast and Northeast, although California's budget crisis could crimp demand on the West Coast in 2004.

Rate hikes will gain more support when new rules for truck drivers' hours of service take effect this month. The government estimates this change will add $1.3 billion a year to trucking companies' costs. At a Georgia Institute of Technology seminar on the new rules last October, Albrecht said truckload rates were likely to see a 4-percent to 7-percent hike in 2004, including accessorial fees. "Without the hours-of-service regulation change, the increase would have been 4 percent alone due to tight capacity and the improving economy. Hours-of-service changes will only make that number go higher," he says.

Broughton, on the other hand, thinks truckload rates will continue rising in the 3- to 4-percent range this year. But he agrees there's lots of uncertainty out there that could throw a wrench into anyone's forecast. One example: Many carriers have announced a doubling or even tripling of accessorial fees for making additional stops and for the time to load and unload.

Broughton also predicts that this year will be different than past years when it comes to rate negotiations between shippers and truckload operators. High fuel and insurance costs, uncertainty over the cost of new environmentally compliant engines (required for all engines purchased after October 1, 2002), and a tightening supply of drivers have made the rate outlook murkier than usual. "Normally, the trucking industry proceeds to build too many trucks and gives away pricing power," he says. "Not now—2004 looks to be anything but typical."

Truckload shippers aren't the only ones that will pay more to move their freight this year. Edward M. Wolfe, an analyst with Bear, Stearns & Company Inc. in New York City, argues that the 7.2-percent GDP gain in the third quarter, together with continuing improvements in the economy, will also allow air express and overnight ground carriers to boost rates.

In an earnings report late last year, Wolfe noted that freight forwarders are being squeezed in the air and on the ocean. "Increased rates for both airfreight (particularly in the Asia-to-U.S. trade lane) and ocean-freight capacity providers have had a negative impact on international freight forwarders," he said. To the extent that forwarders planned poorly for rate hikes, those increases will funnel down to their shipper customers.

The rate outlook for water transportation appears to be even more daunting, if current trends are any indication. For instance, the Baltic Freight Index, which charts ocean freight rates for dry cargo, doubled in just two months between August and October 2003. One cause: China's appetite for basic industrial supplies has been diverting bulk shipping vessels from North America, putting extreme pressure on rates.

Look for ocean carriers to use other tactics to boost revenues, such as separating rates and surcharges and asking for contract terms that give carriers and shippers the option to amend rates on 30 days' notice. Some importers and exporters fear that such unplanned increases in transportation costs could eliminate their profit margins, and are writing contracts that include options to withdraw should those costs substantially increase.

Container operators have already had some success in pushing up rates, particularly for agricultural products. General rate increases announced in 2003 ranged from $200 to $900 per container for inbound agricultural cargo. A dearth of refrigerated railcars for moving agricultural products to West Coast ports and an acute shortage of refrigerated ocean containers also plagued exporters of beef, poultry, and pork.

An economic upturn will give ocean carriers more pricing clout. Adding fuel to the rate fire is the fact that capacity appears to be fairly tight, says Manny Hontoria, a principal at Boston-based Mercer Management Consulting. "Containerized shipping is in a fairly significant cyclical upturn now," he says. He predicts that liners will seek another $450 to $600 average rate increase for 2004, plus a peak-season surcharge of about $400.

Nonetheless, Hontoria remains sanguine about the future. "These things are cyclical and over the longer term, peaks are followed by troughs," he says.

That's true for all modes of transportation, of course. Although that knowledge may offer some small comfort, for this year, at least, shippers have no choice but to look for cost savings from operational improvements and optimized distribution patterns rather than at the negotiating table.