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North American Industry Classification System (NAICS)

A hierarchical coding system that groups businesses into industries

What is the North American Industry Classification System (NAICS)?

The North American Industry Classification System (NAICS) is a hierarchical coding system that groups businesses into industries. NAICS organizes industries based on their production processes. It allows for the comparison of business activity statistics in the North American trading bloc. The first version of NAICS was released in 1997 and an updated version was released in 2002.

 

North American Industry Classification System
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The system is reviewed every five years to ensure that it reflects industry changes. The most recent revision was released in 2017. NAICS effectively replaced the US Standard Industrial Classification System (SIC), which was created in 1937.

 

Summary

  • The North American Industry Classification System (NAICS) is an industry classification system that was developed jointly by NAFTA member countries, i.e., the United States, Canada, and Mexico.
  • NAICS facilitates an easier comparison of economic data and statistics of all countries in the North American trade bloc.
  • The first NAICS version was published in 1997. It is revised every five years.

 

Background of NAICS

NAICS is a collaborative effort between government agencies of the three signatories of the North American Free Trade Agreement (NAFTA) – the United States, Canada, and Mexico. The three agencies involved in the creation and maintenance of NAICS include the Economic Classification Policy Committee at the United States Office of Management and Budget, Statistics Canada, and Instituto Nacional de Estadística y Geografía (INEGI) of Mexico.

The goal of the three agencies was to create a classification system that would provide comparable statistics for industries operating in the three countries while accommodating local industries in each of the three economies.

The first NAICS system was published in 1997 to provide comparable statistics in both the service and manufacturing industries. In the same year, the US Office of Management and Budget announced its decision to adopt the new classification system, replacing the Standard Industry Classification System (SIC).

The new NAICS system covered over 150 new service industries, relative to SIC. A revised version of NAICS was released in 2002. This version included substantial changes to the construction sector and retail and wholesale trade, as well as to the information sectors.

In 2012, the agencies released a revised NAICS version that reduced the number of industries and modified the system’s sector classifications. The recent 2017 NAICS version adjusted the number of industries from 1065 to 1057. The change affected eight industries, after 29 industries were split, reclassified, and combined to create 21 industries.

 

Framework of the NAICS Code System

The NAICS code system uses a six-digit hierarchical system that offers more flexibility than the four-digit system of SIC. The NAICS system includes both service and manufacturing industries, which is an improvement from the manufacturing-oriented Standard Industrial Classification system.

The NAICS classifies economic activities into 20 industrial sectors, which are further subdivided into subsectors, industry groups, and national industries. Five of the industrial sectors are related to industries that manufacture goods, while 15 sectors are related to the service sector. Most of the five-digit industries are similar in all three participating countries to allow for easy comparability of company data.

A NAICS code’s six-digit ID helps identify the specific industry that a business operates in. The first two digits identify the broad industrial sector that a business operates in. The third digit identifies the subsector that a business operates in. The fourth digit identifies the industry group of a company. The fifth digit designates a company’s specific industry, whereas the sixth digit assigns the specific national industry that a company operates in.

For example, the NAICS code for law firms is 541110. The first two digits, i.e., 54, identify the sector that the company belongs to, which is “Professional, Scientific, and Technical Services.” The third digit, 1, shows the subsector that the company belongs to, whereas the fourth digit, 1, shows the industry group. The fifth digit, 1, shows the industry where the company operates from, and the sixth digit, 0, shows the specific national industry category of a company.

 

NAICS Code System

 

 

NAICS vs. SIC

Several differences stand out between the NAICS and the Standard Industry Classification System (SIC). The following are the key differences:

Comparability

The SIC system was primarily used in the United States as the primary classification system for economic activities. It was not associated with the economic data tracking systems of the other NAFTA members, such as Canada and Mexico. Therefore, SIC was not a reliable tool for comparing economic data between the three countries.

The NAICS, on the other hand, was created by government agencies from the participating members and enables analysts to directly compare economic data and statistics published by the members.

 

Relevance to Recent Trends

The NAICS is revised every five years to reflect new market trends, making it a relevant comparison tool. It is updated by adding, modifying, splitting, reclassifying, and combining industry categories to reflect recent market changes and allow for comparison of market data from the three countries.

In contrast, the SIC was revised once a decade, which is a long duration in the ever-changing market environment. Therefore, the NAICS is a more relevant classification system than the SIC since it is updated regularly to reflect market changes.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Banking and Securities Industry Committee (BASIC)
  • Economic Indicators
  • National Association of Securities Dealers (NASD)
  • NAIRU

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