North American Industry Classification System (NAICS)

The North American Industry Classification System (NAICS) is an industry coding system designed to facilitate the collection, analysis, and presentation of economic data in the United States, Canada, and Mexico, all member nations of the North American Free Trade Agreement (NAFTA). First implemented in 1997, the NAICS is the successor to the Standard Industrial Classification (SIC) system, which had been used by U.S. agencies to compile and track national business data, and economic activity data generally, for more than six decades.

Collecting information about and reporting on something as large as the U.S. economy is an enormous task. Organizing this task by creating a hierarchical classification for the incoming data is an essential part of tackling the job. NAICS is the newest industry classification system being used to do this job in the U.S. Experienced business analysts, journalists, and economists are all familiar with both the SIC and NAICS systems. They are also frequent users of the wealth of data that U.S. federal government agencies collect and publish regularly. When those data are economic in nature—for example, average labor unit cost for bicycle manufacturing, annual output by the financial services industry, or number of gas stations in a metropolitan area—they are organized by NAICS codes. The easiest way to access these data sources is to use the classification system used to organize them, the NAICS.

The U.S. Census Bureau touts the NAICS as "a unique, all-new system for classifying business establishments. It is the first economic classification system to be constructed based on a single economic concept. Economic units that use like processes to produce goods or services are grouped together. This 'production-oriented' system means that statistical agencies in the United States will produce data that can be used for measuring productivity, unit labor costs, and the capital intensity of production; constructing input-output relationships; and estimating employment-output relationships and other such statistics that require that inputs and outputs be used together'¦. NAICS is forward looking and flexible, anticipating increasing globalization and providing enhanced industry comparability among the NAFTA trading partners while recognizing important national industries and providing for periodic updates through three-country review [the United States, Canada, and Mexico]. NAICS recognizes the structural and technological changes occurring in the economies of the three North American countries and provides the means to measure these changes well into the next millennium."

THE SIC SYSTEM

The predecessor to the NAICS—the Standard Industrial Classification system—was the first comprehensive classification system used by American government agencies to organize economic statistics.

The SIC system was an establishment-based industry classification system that classified each establishment (defined as a single physical location at which economic activity occurs) according to its primary activity. For each of these recognized industries, the government kept detailed statistics in such areas as employment, payroll, receipts, profits, and capital investment.

After its unveiling in 1937, the SIC system's universe of economic data became a heavily utilized tool for conducting business research and tracking economic trends. Government agencies, nongovernmental organizations, and private businesses alike made extensive use of the data. But despite periodic updates and revisions to the SIC classification system, its inadequacies became more glaring with the passage of time.

The fundamental problem was that the SIC system was based on concepts developed in an era of American history—the 1930s and 1940s—when manufacturing was the dominant economic engine. Many service activities were not separately identified, and as service-oriented businesses became more important, SIC revisions did not keep pace. The economic statistics contained in the SIC system thus became progressively more incomplete as newly technologies and areas of endeavor were not covered. This under representation of important economic sectors was further exacerbated by the SIC's framework, which gathered unrelated industries together into similar categories.

Despite its imperfections, however, the Standard Industrial Classification system continued to be widely used by business marketers through the 1990s. The SIC data did provide them with a method for classifying organizational customers and gauging industry trends (especially in manufacturing sectors), and it remained the only source of these important economic statistics. In addition, the 1987 revision added approximately 20 new service industries and tweaked several manufacturing industry classifications to reflect changing technological realities. Ultimately, however, the SIC system remained an outmoded one. For example, of the 1004 industries recognized in the 1987 Standard Industrial Classification program, nearly half (459) represented manufacturing, even though manufacturing's share of the U.S. Gross Domestic Product (GDP) has shrunk to less than 20 percent of the nation's total. "The SIC did a superb job of describing and detailing the structure of the footwear industry in the United States, but failed to recognize and account for the information age in which we live and work," summarized Carole Ambler in Business America. "The SIC scattered the production of high-tech products such as computers, semiconductors, and communications equipment in groupings of industrial machinery and electrical equipment, and included the reproduction of shrink-wrapped software in the same industry with software publishing."

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