Freight & Industrials Outlook: What’s Driving Growth into 2027?

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The US industrial sector is experiencing its strongest growth in years, with the ISM index hitting 55.6 for the seventh consecutive month. We dive into the surprising drivers, from AI data centers and tax incentives to resilient consumer spending. But are there risks lurking with capacity exits and grid infrastructure? Senior Industrials Analyst Ryan Farlow shares his insights on what’s ahead for manufacturing and the freight market.

The ISM Manufacturing index hit 55.6 — its highest reading in years — marking seven straight months of expanding industrial activity, RSM industrial analyst Ryan Farlow told FreightWaves. Farlow said 15 of the 18 sectors tracked within ISM Manufacturing increased in the most recent reading, a sign that demand has spread well beyond AI data center construction into aerospace and defense, semiconductors, and chemicals.

The breadth of that expansion matters to carriers and shippers because it signals durable freight demand rather than a single-sector spike. Farlow attributed the industrial rebound to several overlapping forces: data center construction, tax incentives tied to reshoring under the One Big Beautiful Act, 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.

“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. 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.

“Costs in trucking are as high as they’ve ever been,” Farlow said, citing the American Transportation Research Institute’s most recent Cost in Trucking report, released last month, and noting that 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.

On the supply side, Farlow said 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 he hears from client executives. Compounding that pressure: since 2019, registered motor carriers increased 30% while shipment volumes declined 10%, a mismatch that is now correcting as weaker operators exit.

Freight expenditures are up 12% since 2019 even as shipments are down 10%, a gap Farlow said reflects growing efficiency — carriers moving larger volumes in fewer loads across both truckload and LTL. That dynamic is helping the supply-demand imbalance self-correct, but it also means raw shipment counts understate the actual volume of freight moving through the network.

Looking ahead, Farlow flagged data center construction slowdowns as the primary risk to the industrial outlook. Birmingham itself imposed a six-month moratorium on new data centers, and roughly 500 municipalities nationwide have enacted bans or pauses. He said the core issue is grid underinvestment rather than data centers themselves, and estimated it will take at least three to five years to make meaningful progress on transmission capacity. Despite near-term friction, Farlow said RSM believes the data center buildout remains a multi-year tailwind for industrials and freight, and that private equity funds investing in transportation infrastructure are already anticipating a surge in deal activity by 2027.

• ISM Manufacturing reached 55.6, its highest level in years, with 15 of 18 sub-sectors expanding — broadening beyond AI data centers to aerospace, defense, and chemicals.

• RSM’s Farlow says the freight recession ended in November-December, with capacity exiting via bankruptcies, CDL enforcement, and a shrinking driver pool driving contract rate increases.

• RSM projects 2.5% GDP growth in the second half and sees 2027 as even more favorable, with PE funds eyeing increased M&A activity in transportation and logistics.

Speaker 1 [0:00] Oh, well, look, the industrials are super hot. To talk about those, we have our first guest, Ryan Farlow. He is the industrial analyst at RSM. Ryan, welcome to FreightWaves Today.

Speaker 2 [0:09] Thanks, Craig. Thanks, Julie. Happy to be on with you guys today.

Speaker 1 [0:14] Well, you’re coming to us from Birmingham, Alabama. There’s not a more industrial city in America than in Birmingham, Alabama. Ryan, appreciate you coming in. Tell us about the state of the industrials right now.

Speaker 2 [0:27] Well, industrials are hot. I know you guys have talked a little bit about the ISM reading that came out recently. We’re at 55.6, highest reading in years. We’re at the 7th straight month of an increase in industrial activity. And so what’s really encouraging when we think about industrials broadly is that, you know, it’s really been led by the data center buildout. And in the recent ISM reading, we’ve really seen the demand broaden out. 15 out of the 18 sectors within ISM Manufacturing increased. So now it’s not just AI data centers, it’s aerospace and defense, it’s other semiconductors. There’s other elements, chemicals and other elements that are increasing broad manufacturing demand outside of just kind of the narrower database buildout. So it’s very encouraging.

Speaker 1 [1:14] Ryan, do we think this is the catalyst? Was the catalyst really the AI data centers, the amount of capital and CapEx that went in to sort of bring the industrials out of the recession, the contraction that we saw over the last couple of years? Was it really, was that the trigger? And then you combine that with defense production and frankly higher energy prices are net positive for US industrials. But what do you attribute the economy in terms of industrials coming back?

Speaker 2 [1:43] Well, I think it’s nuanced and there’s a lot of different things. I certainly think the AI data center construction boom is certainly helping, but there’s so many other things at play here. We have the impacts of OBA, the tax bill that created some great incentives to reshore and to build new facilities that get, you know, bonus depreciation and other increases. You have kind of the tariff policy and landscape that has encouraged companies to bring manufacturing closer to home. And ultimately, you have a very strong consumer. We’ve seen consumer spending continue to increase. Private demand, which in the GDP number that just came out, real private demand was 3.9%. which tells us consumers are spending, and ultimately the manufacturing is gonna follow that. So as long as consumers keep spending and they’re healthy, we just feel like manufacturing will continue to follow and be strong. And we’ve seen that recently show up in the data.

Speaker 3 [2:39] So I wanna talk also about the capacity side of the equation, not just the demand. I think that we love, you know, hearing channel checks and confirmation of sort of this industrial revitalization that we’ve been talking about, but you all specialize kind of in that mid-market. size. So what are you seeing from a capacity exit and with that sort of size of carrier?

Speaker 2 [3:01] Yeah, so we serve— there’s over 500 transportation logistics companies that we serve here at RSM out of the US, and they’re small, mid, large cap, but 80 to 90% of our clients are in the middle market, upper middle market. They’re family-owned, they’re private equity-owned, and we are, you know, hearing consensus at this point. Obviously, the freight recession is ove