The US industrial sector is experiencing its strongest expansion in years, with the ISM Manufacturing Index reaching 55.6 — its highest reading in years — for the seventh consecutive month of growth. Readings above 50 signal expansion in the manufacturing economy. RSM industrial analyst Ryan Farlow told FreightWaves that 15 of the 18 sectors tracked within ISM Manufacturing increased in the most recent reading, signaling that demand has broadened well beyond AI data center construction into aerospace and defense, semiconductors, and chemicals.

That breadth matters to carriers and shippers because it points to durable freight demand rather than a single-sector spike. The last major freight cycle peaked in 2018 before a prolonged downturn; a broad-based recovery has been the missing ingredient for sustained rate growth. Farlow attributed the industrial rebound to several overlapping forces: data center construction, tax incentives tied to reshoring under the One Big Beautiful Act (OBA), tariff policy pushing manufacturing closer to home, and a resilient consumer. Real private demand in the most recent GDP print came in at 3.9%, and RSM projects GDP growth of roughly 2.5% in the second half of the year, with 2027 shaping up as even more favorable than 2026.

Freight Recession Is Over

"The freight recession is over," Farlow said, pinpointing November and December of last year as the turning point driven by regulatory and compliance enforcement. RSM works with more than 500 transportation and logistics companies, with 80% to 90% of those clients in the middle market or upper middle market. They are family-owned and private equity-owned businesses.

Farlow said executives across that client base are now reporting contract rate increases and stronger July results, with spot prices having risen substantially and contract rates expected to follow. He noted that every rate increase flows directly to the bottom line for asset-heavy carriers.

However, costs remain a significant concern. "Costs in trucking are as high as they've ever been," Farlow said, citing the American Transportation Research Institute's (ATRI) most recent Cost in Trucking report, released last month. ATRI is the research arm of the American Trucking Associations, the largest national trade association for the trucking industry. Middle-market carriers are running aging equipment longer while navigating elevated insurance expenses and litigation risk from cases such as Montgomery and C.H. Robinson. Farlow said RSM is having extensive conversations with brokers about adjusting their businesses to accommodate growing legal exposure.

Capacity Exits and Driver Shortage

On the supply side, capacity exits that began with rising bankruptcies in 2023 and 2024 have accelerated under the crackdown on non-domiciled CDLs and the ELP mandate. The driver pool has shrunk to the point where finding qualified drivers is now the top operational concern Farlow hears from client executives. He expects litigation pressures to further strain companies trying to recruit and retain drivers.

Compounding the supply-side correction: since 2019, registered motor carriers increased 30% while shipment volumes declined 10%, a mismatch that is now correcting as weaker operators exit the market.

Freight expenditures are up 12% since 2019 even as shipments are down 10%. Farlow said this gap reflects growing efficiency — carriers are moving larger volumes in fewer loads across both truckload and LTL. He referenced the Cass Index, a closely followed monthly barometer of North American freight shipment volumes and expenditures published by Cass Information Systems, noting that although volume is flat to up, the decline in shipment counts is likely due to market efficiency gains. That distinction is important, he explained, because moving larger amounts of freight in the same or fewer shipments helps the supply-demand imbalance self-correct. However, it also means raw shipment counts understate the actual volume of freight moving through the network.

Consumer Spending and GDP Outlook

Farlow said there is no reason to believe the industrial expansion will not continue. RSM projects GDP growth of about 2.5% in the second half of the year, with an even more favorable setup for 2027. He noted that real private demand came in at 3.9% in the latest GDP report, indicating consumers are still spending, and manufacturing tends to follow consumer demand.

Potential disruptions include whether consumers will continue spending in the face of elevated borrowing costs, fuel prices, and inflation. So far, Farlow said, consumers have not pulled back. He suggested that a large tax refund in the spring gave consumers additional spending capacity, and while savings are declining, spending patterns have not shifted. He described the labor picture as stable, with real wages continuing to be positive. RSM is also expecting a record holiday season, with a projected 4% increase in holiday sales compared to last year.

Data Center Construction: Risks and Tailwinds

Farlow flagged data center construction slowdowns as the primary risk to the industrial outlook. Birmingham, Alabama, imposed a six-month moratorium on new data centers, and roughly 500 municipalities nationwide have enacted bans or pauses. Texas Governor Greg Abbott initiated a review involving audits of data centers, which Farlow suggested may be partly symbolic and influenced by election considerations. The Texas review was triggered by a pause on new grid connection requests.

Farlow said the core issue is grid underinvestment rather than data centers themselves. He estimated it will take at least three to five years to make meaningful progress on transmission capacity, comparing the timeline to supply chain diversification efforts. The Southeast was highlighted as a region of particular interest — the corridor spanning Nashville, Atlanta, Birmingham, Huntsville, Knoxville, and Chattanooga represents approximately 11 million people and ranks among the world's 20 largest economies.

The Tennessee Valley Authority (TVA), the largest federal utility, which powers Birmingham, Alabama, and Chattanooga, Tennessee, has been proactive in building nuclear capacity and natural gas plants. TVA was created in 1933 as part of the New Deal and remains the largest government-owned electric utility in the United States. Some hyperscalers in the Permian Basin are going directly to natural gas fields and building generators on-site, creating closed-loop systems that could make use of currently flared gas.

Despite near-term friction, Farlow said RSM believes the data center buildout remains a multi-year tailwind for industrials and freight. He noted a messaging disconnect: national polling suggests consumers are largely opposed to data centers in their communities, primarily due to concerns about electricity costs. However, hyperscalers met with President Trump in the spring and agreed to pay their own way on electricity and infrastructure buildout. Farlow suggested that many municipal bans and pauses represent opportunities to ensure communities are not adversely impacted and to align incentives.

Vivek Ramaswamy proposed in a post on X that if a data center is placed in a community, it should pay for the community's electricity. Farlow said the idea seemed reasonable and expressed confidence that hyperscalers would agree to ensure consumers' electricity bills are not negatively affected, though he noted this could involve restructuring existing state and local tax incentives rather than entirely new expenditures.

Farlow cited his hometown of Madison, Mississippi, where Amazon is building a large data center, as an example of community benefits. He said friends still living there report new school investments, improved roads, an influx of supporting businesses, and replenished local and state tax coffers.

M&A Outlook and Industry Consolidation

Farlow described all current market dynamics — capacity exits, rising costs, regulatory enforcement, and litigation — as gravitational forces toward a more consolidated industry structure. While high interest rates and borrowing costs present near-term headwinds, private equity funds invested in transportation infrastructure are anticipating a significant increase in deal activity by 2027.

RSM projects GDP growth of approximately 2.5% in the second half of the year, with 2027 expected to be even more favorable for industrials and freight than 2026.

Source: FreightWaves