Shippers who didn't adjust well to the challenges of 2005—no-show truckers, bidding wars for railcars, and non-stop fuel surcharges—will get another chance to prove themselves in 2006. That's because U.S. economic growth is holding steady at around 3.3 percent, so demand for transportation services will be nearly as strong this year as it was in the last 12 months.

With fuel prices settling down after Katrina and Rita, shippers may have expected that rates would do the same. But capacity will be as tight as ever in every mode except ocean shipping.

As a result, shippers who weathered the logistics storm of the past 18 months aren't likely to enjoy a respite from rising rates anytime soon. "Rates are going up, and you are not going to negotiate your way out of a rate increase," warns logistics consultant Lee A. Clair of Concord, Mass.-based Norbridge Inc. Indeed, Clair says, any shipper who is asking if rates will go up is asking the wrong question.

The more important question now: What will you do to manage the situation? For even without another devastating natural disaster, the outlook for the logistics market suggests that shippers and carriers alike will be tested again in 2006.

Before looking at how shippers are managing, let's first examine the macroeconomic trends that are driving demand, and why supply-side constraints will take so much longer to lift than in past business cycles.

Somewhat paradoxically, the positive overall forecast for the U.S. economy also makes the logistics outlook for the coming year appear daunting.

A panel of 50 top economists is predicting that the U.S. gross domestic product (GDP), after growing an inflation-adjusted 3.5 percent in 2005, will register an average 3.3 percent gain in 2006. (See Figure 1.) This consensus forecast from the November 2005 Blue Chip Economic Indicatorsis bounded on the high side by a 3.9 percent prediction proffered by economists at both the National Association of Realtors and at Bear, Stearns & Company. On the low side, Merrill Lynch Economics sees GDP up only 2.7 percent in 2006. The only logistics-related company in the survey sample, FedEx Corporation, calls for a 3.6 percent growth rate.

Furthermore, inventories are very lean, a fact that will influence both economic growth and pressure on shippers. "The consensus forecast assumes rebuilding [inventories] will be a significant contributor to GDP growth in 2006," says Moore. Inventory growth means more production and movement of goods, increasing the strain on already-stretched logistics resources. There will be plenty of competition for what capacity there is: The consensus forecast says faster growth abroad will encourage North American exports.

In a word, this economy is resilient. James Haughey, director of economics for Logistics Managementparent Reed Business Information, says that resilience became clear when fuel prices quickly returned to equilibrium after the supply shock of Katrina and Rita. "Gasoline prices came down quickly due to surplus supplies from Europe and the Caribbean, and the 40-cent premium that remains on diesel fuel will wind down," Haughey says. The pace of that decline, he adds, will depend on how cold the winter is because diesel and home heating oil use the same raw components. Looking ahead, Haughey expects crude oil prices to drop another $10-plus per barrel in the coming year.

A drop in the price of diesel fuel can't come soon enough for smaller trucking companies, which have a harder time making fuel surcharges stick than their large competitors. For some, though, it's already too late. According to Thomas Albrecht, managing director at investment analysts Stephens Inc., truck repossessions shot up 188 percent in the third quarter of 2005 compared to the same period a year earlier. Also telling is the fact that the number of shipments handled by small truckload carriers in the first three quarters of 2005 declined 2.4 percent from the prior year.

High fuel costs aren't the only thing discouraging new entrants in the long-haul trucking industry. The high cost of insurance has been a big problem, too. Albrecht estimates the average bodily-injury and physical-damage deductible among 12 publicly held carriers stood at only $443,000 per incident in 1999. That figure jumped to $2.7 million in 2004 and $3.2 million in 2005.

Even if fuel and insurance costs hadn't budged, capacity constraints would persist due to a severe shortage of drivers. According to an American Trucking Associations-sponsored study by economists at Global Insight, the U.S. economy is short 20,000 truck drivers right now. That shortage is forecast to hit 111,000 in eight years as the economy grows and the aging labor pool begins to retire.

These trends will make buying truckload services as difficult in the coming 12 months as it has been over the past couple of years. "Shippers will have to decide: Do I take a chance there will be enough capacity in small and medium-sized carriers, or pay now in order to avoid the worst of the spot market?" Albrecht says. "Don't be a sucker for a slow period," he cautions. "We have a multi-year capacity problem, and industry consolidation is still accelerating." He is forecasting that the sharp rise in rates since 2003 will continue in 2006. (See Figure 3.)

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