It's true that the North's larger population and substantially larger industrial capacity proved decisive, and it's equally true that many people (not only Sherman) recognized this before the first shot was fired at Fort Sumter. But many people also recognized the overwhelming advantage England had held over the American colonies in their own war for independence (which the Americans also fought as a defensive war). This was the example that many southerners kept in mind when they went to war -- there was a great deal of sentiment in the Confederacy that they were carrying on in the tradition of George Washington (a Virginian, they would have reminded us).

The South never expected to win the war based on military might alone. They hoped to exhaust the North's will to fight. At a couple of points in the struggle, they almost succeeded. In fact, Lincoln himself was very worried that they might succeed, and that McLellan would win the election of 1864 and bring the war to an end through a negotiated separation. With the enormous casualty lists, and superior Southern generalship leading to seemingly endless Confederate victories on the battlefield, sentiment to end the war and let the South go its own way was very strong in the North.

The Confederacy also hoped to bring England in on their side, much as the American colonies had brought in France; not an entirely realistic hope in retrospect, but clearly a significant component of their strategy.