NAICS Codes: A New Industry Classification System
by
Heather Hedden

A Change for the Business Researcher

This year the U.S. government is introducing a new industrial classification system to replace the Standard Industrial Classification (SIC) code system, which has been used by government, industry, and researchers, since 1935.

For the business researcher, the use of SIC codes has been relied upon as a common indexing method used across hundreds of different U.S. databases from different publishers and online vendors. While different databases may use different subject terms, industry names, company name formats, and other coding schemes, the SIC system, developed by the U.S. government, is the most standard classification system for business articles and company name directory records.

The commercial sector had been looking forward to an update to the SIC system, which had last been revised in 1987, to reflect new technologies and industry segments. Instead of a mere update, however, the U.S. government formally introduced in April, 1997 an entirely new industry classification system to replace the SIC system, called North American Industry Classification System (NAICS). Understanding and adapting to the new NAICS codes thus calls for more attention by information producers and searchers than would a simple update of the old SIC system.

The Purpose of NAICS Codes

NAICS codes are to be used for the same purposes as SIC codes. However, as its name implies, NAICS codes will be used in all three North American countries, and not by the United States alone. The system was jointly developed by the US Economic Classification Policy Committee, Statistics Canada, and Mexico's Instituto Nacional de Estadistica, Geografia e Informatica.

The objectives in developing the NAICS were to:

  • classify establishments based on similar production processes, as compared to products and services in the SIC system
  • pay special attention to emerging industries, service industries, and advanced technology
  • maintain continuity with existing coding schemes whenever possible, so as to enable time series data comparisons
  • conform to the two-digit level of the United Nations' classification system, the International Standard Industrial Classification of All Economic Activities

Government Use of NAICS Codes

The U.S. government had established SIC codes, and similarly NAICS codes, for its own purposes of gathering statistical data. The codes are used to classify establishments by their primary economic activity, and thus data can be compared for describing various industries. The specific government agencies which have been involved in developing the classification system for their purposes have been the Bureau of Economic Analysis, the Bureau of Labor Statistics, and the Census Bureau. Other government regulatory and administrative agencies not involved in the development of SICs or NAICS codes have also used SICs and will use NAICS codes. State and local governments also use the codes.

Comparison of NAICS and SIC Codes

SIC and NAICS codes are both hierarchical numeric classification systems, with the first digit or two designating the broad industry sector and subsequent digits each reflecting more specific industry categories. There are certain similarities between the industry sectors in both systems. For example, the first sector with the lowest first digit is agriculture, followed by mining, and then construction; manufacturing begins with the digit 3; wholesale trade, retail trade, and transportation are industry sectors in the middle of the list; codes beginning with 6, 7, or 8 are for services, and those beginning with 9 are for public administration.

The most obvious difference, though, between the two classification schemes, is that NAICS codes are six digits, whereas SIC codes are only four. Despite the additional digits, the NAICS codes are for the most part not much more specific than SIC codes. This is because an additional digit has been added to the major industry sector classification. Where in the SIC system there are ten major industry sectors, in NAICS there are 20. In some cases, what were second-tier industry groupings in the SIC system have been elevated to a major sector in NAICS. In other cases, new industry sectors have been created, such as one for the Information industry, which includes broadcasting, motion pictures and recording, information services, and data processing.

The other additional digit used by NAICS codes is the sixth digit which is reserved for country-specific industries. Thus, with only some exceptions, the NAICS codes are common across the United States, Canada, and Mexico up to the fifth digit.

The number of industry classifications in NAICS is 1813, compared to 1500 SIC elements. The area where NAICS codes do get more specific than SIC codes is in the services category. For example, where there is only one SIC code for Miscellaneous Services Not Elsewhere Classified, there are now 10 new service categories designated by individual NAICS codes.

Reasons for the Changes

Even before it was decided in 1994 to develop a standard classification system for all of North America the Office of Management and Budget (OMB), the U.S. federal office that oversees the SIC codes, had determined that the SIC codes should be revised by 1997, and the next update should be more significant than previous ones. In 1992, the OMB established the Economic Classification Policy Committee and charged it to conduct a "fresh slate" examination of economic classification.

It had become clear that the SICs of 1987 did not accurately represent new industries and changing industry definitions. Therefore, it was decided that the new codes would pay more attention to new and emerging industries, service industries in general, and advanced technology industries.

Meanwhile, the passage of the North American Free Trade Agreement in 1992 created a need to accurately compare various statistics, such as international trade, industrial, production, and labor costs across the three countries of the United States, Canada, and Mexico. So, the three countries decided to develop an entirely new classification system which would take into consideration each country's existing classification systems and likely future needs.

Schedule of Changes

NAICS will first be applied to government data for 1997 in Canada and the United States, and data for 1998 in Mexico.

The United States will start implementing NAICS this year, with the Census Bureau's 1997 Economic Census. The first NAICS-based statistics from this data collection will be issued in early 1999. The various annual surveys of the Bureau of the Census will start implementing NAICS in 1998 and 1999, although the data will not be published until 2000 or early 2001. The Bureau of Labor Statistics plans to implement NAICS for its reports on wages and employment in 2000 and 2001 with publication in 2002 and 2003. The Internal Revenue Service plans to start using NAICS in the 1998 tax year.

Other government agencies and the private sector are also making plans to introduce NAICS codes in 1998 or in following years.

IAC's Position on NAICS Codes

IAC will be adding NAICS codes to all of its databases that currently have SIC codes as an indexing field. SIC codes will continue to be supported in addition to the new NAICS codes until it is determined that there is no longer a market need for SICs. IAC has already created a map of SIC codes to NAICS codes to be used for its company profile records, whereby a company's SIC will automatically generate a NAICS code as well. It is ready for system implementation once the fully defined NAICS codes are published by the Census Bureau at the end of 1997.

In addition to SICs, IAC also uses its own Product Code classification system. Product Codes were originally developed for the PROMT database, but over 1993-1994 were extended to Trade & Industry Database, Computer Database, Newswire Database, and selected business-related articles in other databases. Product Codes are based on SIC codes but have seven digits instead of four, and thus are much more specific than either SIC codes or NAICS codes. IAC has no plans to discontinue the use of Product Codes. For all of IAC's databases that use Product Codes, the additional NAICS codes will automatically be generated for the retrospective data by use of a map of Product codes to NAICS codes. Once the map has been completed and the earlier data mapped to the new codes, IAC will be able to supply product codes, SIC codes, and NAICS codes for all appropriate records.

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Tips for Finding More Information About this Topic in InSite Pro

Strategy 1
  • Select Trade & Industry Database
  • Select Fielded Search
  • In the Subject field, enter North American Industry Classification System
  • or enter Standard Industrial Classification
Strategy 2
  • Select Trade & Industry Database
  • Select Browse Thesaurus
  • In the Subject field, enter Industry
  • Select sub-topics
  • Select Classification

Bibliography

Boettcher, Jennifer. "NAFTA Prompts a New Code System for Industry - The Death of SIC and Birth of NAICS." Database, Apr.-May 1996: 42+. Online. InSite Pro. 16 July1997.

Keating, Michael. "No Nix on NAICS: That's Pronounced "Nakes," and it Stands for North American Industry Classification System." Industry Week 2 Dec 1996: 47+. Online. InSite Pro. 16 July1997.

Millard, Pete. "Revamp in Store for Federal SIC Codes." The Business Journal-Milwaukee 17 Jan. 1997: 5. Online. InSite Pro. 16 July1997.

Quint, Barbara. "The SIC are Dying: New Federal Industry Code on the Way." Searcher Sep. 1996: 41+. Online. InSite Pro. 16 July1997.

1997 North American Industry Classification System -- 1987 Standard Industrial Classification Replacement. Hp 9 Apr. 1997. Online. U.S. Census Bureau. Available: http://www.census.gov/epcd/naics/naicsfr8.txt

About the Author

Heather Hedden is a Vocabulary and Quality Management Editor at IAC. Prior to her current position, she worked at IAC as an abstractor/indexer for the Trade & Industry and PROMT databases and as a senior editor for the Industry Express database. She has also been a contributing writer to various business reference books for Gale Research. Comments to the author should be directed to Heather_Hedden@iacnet.com .

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