Jared: That issue of renting out slaves poses a problem. How many factories (when renting slaves was no longer economical) were unable to remain in business?
Some closed, but the more efficiently-run ones usually survived.
Renting slaves was usually done by those factory owners who were either just starting out (and thus did not have the capital to buy large numbers of slaves) or who were in a hurry to expand their workforce, and so used whatever temporary labour was available (rented slaves, free hired labour)
If the factories were successful over time, they would usually (though not always) gradually shift to owning the slaves outright. A cotton boom would make it harder for them to expand their activities, but was less of a problem for them losing their existing workforce, since the slaves were owned outright. At least not having a rented workforce gave them more time to adjust.
So in other words, when cotton prices were low, lots of factories started up. The less efficient ones were squeezed out when cotton prices rose (or just went bust through mismanagement). The more efficient ones adapted, although they had problems expanding their workforce much during cotton boom times. For instance, during the 1850s, while the total number of textile factories was flat or went down in most states, the overall textile production still expanded significantly.
Pre-war Southern industry seems to have been more severely boom and bust than was healthy as far as overall development went. Not to say this was unique to the South, but industrialists seem to have managed to overcome that in the North - but there was never consistent effort at that in the South overall.
Southern industrialists made some efforts to manage boom and bust, but yes, on the whole, they suffered more than the North. The main difference is one beyond their control to adjust: immigration. Factory workers in the North tended to be immigrants or (in some cases) under-employed white women. Free, native-born white males hated factory work in both the North and the South. Since migrants largely avoided the South, this will exacerbate any boom and bust in the South.
Transferring slaves to cotton production when cotton prices are good inevitably means a greater production of cotton, which sooner or later means cotton prices drop, and . . . it sounds like an unpromising cycle. Good for a few individuals, but not necessarily overall economic growth.
The process of transfer was usually a gradual one - a shift over 5-10 years. It rarely involved directly owned slaves (except when the factory went bust, of course). So there was a decent amount of time to adjust. But still, on the whole, as you point out, there will be a more severe boom-bust cycle than in the North.