Introduction to USA NAICS Charts Training

The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business. 

Introduction to NAICS

The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business. 

NAICS was developed under the auspices of the Office of Management and Budget (OMB), and adopted in 1997 to replace the Standard Industrial Classification (SIC) system. It was developed jointly by the U.S. Economic Classification Policy Committee (ECPC)Statistics Canada This link to a non-federal Web site does not imply endorsement of any particular product, company, or content., and Mexico’s Instituto Nacional de Estadistica y Geografia This link to a non-federal Web site does not imply endorsement of any particular product, company, or content., to allow for a high level of comparability in business statistics among the North American countries.

Interduction.

Background

In 1937, the Central Statistical Board established an Interdepartmental Committee on
Industrial Classification ”to develop a plan of classification of various types of statistical data by
industries and to promote the general adoption of such classification as the standard classification of the Federal Government.”

1 The List of Industries for manufacturing was first
available in 1938, with the List of Industries for nonmanufacturing following in 1939. These
Lists of Industries became the first Standard Industrial Classification (SIC) for the United States.

The SIC was developed for use in the classification of establishments by type of activity in which they are primarily engaged; for purposes of facilitating the collection, tabulation,
presentation, and analysis of data relating to establishments; and for promoting uniformity and
comparability in the presentation of statistical data collected by various agencies of the United
States Government, State agencies, trade associations, and private research organizations.

The SIC covered the entire field of economic activities by defining industries in accordance with the
composition and structure of the economy.

Since the inception of the SIC in the 1930’s, the system was periodically revised to reflect the
economy’s changing industrial composition and organization. The last revision of the SIC was in
1987.

Rapid changes in both the U.S. and world economies brought the SIC under increasing criticism. In 1991, an International Conference on the Classification of Economic Activities was convened in Williamsburg, Virginia, to provide a forum for responding to such criticism and to explore new approaches to classifying economic activity. In July 1992, the Office of Management and Budget (OMB) established the Economic Classification Policy Committee
(ECPC) and charged it with a ”fresh slate” examination of economic classifications for statistical purposes.

The ECPC prepared a number of issue papers regarding classification, consulted with outside users, and ultimately joined with Mexico’s Instituto Nacional de Estadística, Geografía e
Informática (now the Instituto Nacional de Estadística y Geografía) (INEGI) and Statistics Canada to develop the North American Industry Classification System (NAICS), which replaced the 1987 U.S. SIC and the classification systems of Canada (1980 SIC) and Mexico (1994 Mexican Classification of Activities and Products (CMAP)).

The dynamic nature of world economies continues to affect classification systems. The creators of NAICS agreed that the classification system should be reviewed every five years, and revised as appropriate to reflect the changing economies of the three countries. The U.S. statistical programs implemented NAICS for the first time in 1997. NAICS was revised in 2002, 2007, and 2012. This 2017 NAICS revision was undertaken to achieve one main goal—to
modify or create industries to reflect new, emerging, or changing activities and technologies.

The impact of NAICS on various countries has brought about a renewed effort for additional
convergence with the many industry classifications used throughout the world. Future revisions
of NAICS will continue to strive for greater global comparability.

Purpose of NAICS.

NAICS is an industry classification system that groups establishments into industries based on
the similarity of their production processes. It is a comprehensive system covering all economic activities.

There are 20 sectors and 1,057 industries in 2017 NAICS United States.
NAICS was initially developed and subsequently revised by Mexico’s INEGI, Statistics Canada, and the U.S. ECPC (the latter acting on behalf of OMB) to provide common industry definitions for Canada, Mexico, and the United States that will facilitate economic analyses of
the economies of the three North American countries.

The statistical agencies in the three
countries produce information on inputs and outputs, industrial performance, productivity, unit labor costs, and employment. NAICS, which is based on a production-oriented concept, ensures
maximum usefulness of industrial statistics for these and similar purposes.
NAICS United States is used by U.S. statistical agencies to facilitate the collection, tabulation, presentation, and analysis of data relating to establishments; and to provide uniformity and
comparability in the presentation of statistical data describing the U.S. economy.

NAICS United States is designed for statistical purposes. Although the classification also may be used for
various administrative, regulatory, and taxation purposes, the requirements of government agencies that use it for nonstatistical purposes played no role in its development or subsequent
revision.


Development of NAICS as a Replacement for the U.S. SIC

The U.S. ECPC established by OMB in 1992 was chaired by the Bureau of Economic Analysis, U.S. Department of Commerce, with representatives from the Bureau of the Census, U.S. Department of Commerce, and the Bureau of Labor Statistics, U.S. Department of Labor.

The ECPC was asked to examine economic classifications for statistical purposes and to determine the desirability of developing a new industry classification system for the United
States based on a single economic concept. On March 31, 1993, OMB published a Federal Register notice (58 FR 16990-17004) announcing the intention to revise the SIC for 1997, the
establishment of the ECPC, and the process for revising the SIC.

In July 1994, OMB announced plans to develop a new industry classification system in cooperation with Mexico’s INEGI and Statistics Canada. The new system—NAICS—replaced
the U.S. SIC. The concepts of the new system and the principles upon which NAICS was to be developed were announced in a July 26, 1994, Federal Register notice (59 FR 38092-38096)
and were as follows:
1. NAICS will be erected on a production-oriented or supply-based conceptual framework.

This means that producing units that use identical or similar production processes will be grouped together in NAICS.

2. The system will give special attention to developing production-oriented classifications for (a) new and emerging industries, (b) service industries in general, and (c) industries engaged in
the production of advanced technologies.

3. Time series continuity will be maintained to the greatest extent possible. However, changes
in the economy and proposals from data users must be considered. In addition, adjustments will because required for sectors where the United States, Canada, and Mexico have incompatible industry
classification definitions in order to produce a common industry system for all three North American countries.

4. The system will strive for compatibility with the two-digit level of the International Standard Industrial Classification of All Economic Activities (ISIC, Rev. 3) of the United Nations.
The structure of NAICS was developed in a series of meetings among the three countries.

Public proposals for individual industries from all three countries were considered for acceptance
if the proposed industry was based on the production-oriented concept of the system. In the United States, public comments also were solicited as groups of subsectors of NAICS were
completed and agreed upon by the three countries.

The ECPC published the proposed industries for those subsectors in a series of five successive Federal Register notices, in 1995 and 1996, asking for comments from interested data users.

Structure of NAICS.

The structure of NAICS is hierarchical. The first two digits of the structure designate the NAICS sectors that represent general categories of economic activities.

NAICS classifies all economic activities into 20 sectors. The NAICS sectors, their two-digit codes, and the distinguishing activities of each are:

11 Agriculture, Forestry, Fishing and Hunting—Activities of this sector are growing crops,
raising animals, harvesting timber, and harvesting fish and other animals from farms, ranches, or
the animals’ natural habitats.

21 Mining, Quarrying, and Oil and Gas Extraction—Activities of this sector are extracting
naturally occurring mineral solids, such as coal and ore; liquid minerals, such as crude
petroleum; and gases, such as natural gas; and beneficiating (e.g., crushing, screening, washing,
and flotation) and other preparation at the mine site, or as part of mining activity.

22 Utilities—Activities of this sector are generating, transmitting, and/or distributing
electricity, gas, steam, and water and removing sewage through a permanent infrastructure of
lines, mains, and pipe.

23 Construction—Activities of this sector are erecting buildings and other structures
(including additions); heavy construction other than buildings; and alterations, reconstruction,
installation, and maintenance and repairs.

31-33 Manufacturing—Activities of this sector are the mechanical, physical, or chemical
transformation of materials, substances, or components into new products.

42 Wholesale Trade—Activities of this sector are selling or arranging for the purchase or
sale of goods for resale; capital or durable nonconsumer goods; and raw and intermediate
materials and supplies used in production, and providing services incidental to the sale of the
merchandise.

44-45 Retail Trade—Activities of this sector are retailing merchandise generally in small
quantities to the general public and providing services incidental to the sale of the merchandise.

48-49 Transportation and Warehousing—Activities of this sector are providing
transportation of passengers and cargo, warehousing and storing goods, scenic and sightseeing
transportation, and supporting these activities.

51 Information—Activities of this sector are distributing information and cultural products,
providing the means to transmit or distribute these products as data or communications, and
processing data.

52 Finance and Insurance—Activities of this sector involve the creation, liquidation, or
change in ownership of financial assets (financial transactions) and/or facilitating financial
transactions.

53 Real Estate and Rental and Leasing—Activities of this sector are renting, leasing, or
otherwise allowing the use of tangible or intangible assets (except copyrighted works), and
providing related services.

54 Professional, Scientific, and Technical Services—Activities of this sector are performing
professional, scientific, and technical services for the operations of other organizations.

55 Management of Companies and Enterprises—Activities of this sector are the holding of
securities of companies and enterprises, for the purpose of owning controlling interest or
influencing their management decisions, or administering, overseeing, and managing other
establishments of the same company or enterprise and normally undertaking the strategic or
organizational planning and decision-making role of the company or enterprise.

56 Administrative and Support and Waste Management and Remediation Services—
Activities of this sector are performing routine support activities for the day-to-day operations of
other organizations.

61 Educational Services—Activities of this sector are providing instruction and training in a
wide variety of subjects.

62 Health Care and Social Assistance—Activities of this sector are providing health care and social assistance for individuals.

71 Arts, Entertainment, and Recreation—Activities of this sector are operating or
providing services to meet varied cultural, entertainment, and recreational interests of their
patrons.

72 Accommodation and Food Services—Activities of this sector are providing customers
with lodging and/or preparing meals, snacks, and beverages for immediate consumption.

81 Other Services (except Public Administration)—Activities of this sector are providing
services not elsewhere specified, including repairs, religious activities, grantmaking, advocacy,
laundry, personal care, death care, and other personal services.

92 Public Administration—Activities of this sector are administration, management, and
oversight of public programs by Federal, State, and local governments.
NAICS uses a six-digit coding system to identify particular industries and their placement in
this hierarchical structure of the classification system. The first two digits of the code designate
the sector, the third digit designates the subsector, the fourth digit designates the industry group,
the fifth digit designates the NAICS industry, and the sixth digit designates the national industry.

A zero as the sixth digit generally indicates that the NAICS industry and the U.S. industry are the
same.

The subsectors, industry groups, and NAICS industries, in accord with the conceptual
principle of NAICS, are production-oriented combinations of establishments. However, the
production distinctions become more narrowly defined as one moves down the hierarchy.

NAICS agreements permit each country to designate detailed industries, below the level of a
NAICS industry, to meet national needs. The United States has such industry detail in many
places in the classification system to recognize large, important U.S. industries that cannot be
recognized in the other countries because of size, specialization, or organization of the industry.

Typically the level at which comparable data will be available for Canada, Mexico, and the
United States is the five-digit NAICS industry; for some sectors (or subsectors or industry
groups) however, the three countries agreed upon the boundaries at a higher level of detail rather
than the detailed industry structure (five-digit). There is agreement at the sector level for
Wholesale Trade; Retail Trade; and Public Administration. There is agreement either at the
industry group (four-digit) or subsector (three-digit) level for one of the three subsectors in the
Mining, Quarrying, and Oil and Gas Extraction sector, one of the three industry groups in the
Utilities sector, one of the ten industry groups in the Construction sector, two of the four
subsectors in the Finance and Insurance sector, one of the three industry groups in the Real
Estate subsector, and two of the four subsectors in the Other Services (except Public
Administration) sector.

Differences in the economies of the three countries or time constraints necessitated
establishing comparability at a higher level of detail for the sectors and subsectors noted above.

For each of these sectors, except Wholesale Trade and Public Administration, Canada and the
United States have agreed upon an industry structure and hierarchy to ensure comparability of
statistics between those two countries. Canada and the United States also have established the same national detail (six-digit) industries where possible, adopting the same codes to describe
comparable industries. For this reason, the numbers of the U.S. industries may not be
consecutive. In a few cases, it was necessary for the United States to use all of the numbers
available to establish its six-digit detail so that the same six-digit codes do not necessarily
represent comparable industries in the U.S. and Canada.

NAICS with U.S. detail is known as NAICS United States, while Canada and Mexico
produce six-digit detail and publish that detail as NAICS Canada and NAICS (SCIAN in
Spanish) Mexico.

Definition of an Establishment
NAICS is a classification system for establishments. The establishment as a statistical unit is
defined as the smallest operating entity for which records provide information on the cost of
resources—materials, labor, and capital—employed to produce the units of output.

The output
may be sold to other establishments and receipts or sales recorded, or the output may be provided
without explicit charge, that is, the good or service may be ”sold” within the company itself.
The establishment, in NAICS United States, is generally a single physical location where
business is conducted or where services or industrial operations are performed (for example, a
factory, mill, store, hotel, movie theater, mine, farm, airline terminal, sales office, warehouse, or
central administrative office).

There are cases where records identify distinct and separate
economic activities performed at a single physical location (e.g., shops in a hotel). These retailing activities, operated out of Although an establishment may be identical with the enterprise (company), the two terms should not be confused. An enterprise (company) may consist of more than one establishment.

Such multiunit enterprises may have establishments in more than one industry in NAICS. If such
enterprises have a separate establishment primarily engaged in providing headquarters services,
these establishments are classified in Sector 55, Management of Companies and Enterprises.
Although all establishments have output, they may or may not have receipts. In large
enterprises, it is not unusual for establishments to exist to solely serve other establishments of the
same enterprise (auxiliary, or enterprise support, establishments).

In such cases, these units often
do not collect receipts from the establishments they serve. This type of support (captive) activity
is found throughout the economy and involves goods-producing activities as well as services.

Units that carry out support activities for the enterprise to which they belong are classified, to the f the same physical location as the hotel, are identified as separate establishments and classified in the Retail Trade sector, while the hotel is classified in the Accommodation subsector.

In such cases, each activity is treated as a separate establishment
provided:

(1) no one industry description in the classification includes such combined activities;

(2) separate reports can be prepared on the number of employees, their wages and salaries, sales
or receipts, and expenses; and

(3) employment and output are significant for both activities.
Exceptions to the single location exist for physically dispersed operations, such as
construction, transportation, and telecommunications. For these activities the individual sites,
projects, fields, networks, lines, or systems of such dispersed activities are not normally
considered to be establishments.

The establishment is represented by those relatively permanent
main or branch offices, terminals, stations, and so forth, that are either

(1) directly responsible
for supervising such activities, or

(2) the base from which personnel operate to carry out these
activities.

Although an establishment may be identical with the enterprise (company), the two terms
should not be confused. An enterprise (company) may consist of more than one establishment.

Such multiunit enterprises may have establishments in more than one industry in NAICS.

If such enterprises have a separate establishment primarily engaged in providing headquarters services,
these establishments are classified in Sector 55, Management of Companies and Enterprises.

Although all establishments have output, they may or may not have receipts. In large enterprises, it is not unusual for establishments to exist to solely serve other establishments of the
same enterprise (auxiliary, or enterprise support, establishments).

In such cases, these units often
do not collect receipts from the establishments they serve. This type of support (captive) activity
is found throughout the economy and involves goods-producing activities as well as services.

Units that carry out support activities for the enterprise to which they belong are classified, to theextent feasible, according to the NAICS code related to their own activity. This means that
warehouses providing storage facilities for their own enterprise are classified as warehouses.

For certain analytical purposes, an alternative code may be assigned corresponding to the activity
of the enterprise that they support.

Determining an Establishment’s Industry Classification:

An establishment is classified in an industry when its primary activity meets the definition for
that industry. Because establishments may perform more than one activity, it is necessary to
determine procedures for identifying the primary activity of the establishment.

In most cases, if an establishment is engaged in more than one activity, the industry code is
assigned based on the establishment’s principal product or group of products produced or
distributed, or services rendered. Ideally, the principal good or service should be determined by
its relative share of current production costs and capital investment at the establishment.

In practice, however, it is often necessary to use other variables such as revenue, shipments, or
employment as proxies for measuring significance.

There are two types of combined activities that are given special attention in NAICS. They
are vertical integration and joint production. These combined activities have an economic basis
and occur in both goods-producing and services-producing sectors. In some cases, there are
efficiencies to be gained from combining certain activities in the same establishment.

Some of these combinations occur so commonly or frequently that their combination can be treated as a
third activity in its own right and explicitly classified in a specific industry.
One approach to classifying these activities would be to use the primary activity rule, that is,
whichever activity is largest. However, the fundamental principle of NAICS is that
establishments that employ the same production process should be classified in the same
industry.

If the premise that the combined activities correspond to a distinct third activity is
accepted, then using the primary activity rule would place establishments performing the same
combination of activities in different industries, thereby violating the production principle of
NAICS.

A second reason for NAICS recognizing combined activities is to improve the stability
of establishment classification, both over time and among the various agencies that implement
the classification.

An establishment should remain classified in the same industry unless its
production process changes, and different agencies should code the same establishment or type
of establishment in the same way.

A consistent treatment of establishments with combined
activities is more likely if they are classified to a single industry.
Vertical integration involves consecutive stages of fabrication or production processes in
which the output of one step is the input of the next. In general, establishments are classified
based on the final process in a vertically integrated production environment, unless specifically
identified as classified in another industry. For example, paper may be produced either by
establishments that first produce pulp and then consume that pulp to produce paper or by those
establishments producing paper from purchased pulp.

NAICS explicitly specifies that both of
these types of paper-producing processes should be classified in NAICS 32212, Paper Mills, the
final step in paper manufacturing, rather than in NAICS 32211, Pulp Mills. In other cases,
NAICS specifies that vertically integrated establishments are classified in the industry
representing the first stage of the manufacturing process. For example, steel mills that make steel
and also perform other activities such as producing steel castings are classified in NAICS 33111, Iron and Steel Mills and Ferroalloy Manufacturing, the first stage of the manufacturing process.

The joint production of goods or services represents the second type of combined activities.
For example, automobile dealers both sell and repair autos; automotive parts dealers may both
sell parts and repair automobiles; and musical instrument stores may both sell and rent
instruments. In the Manufacturing sector, establishments may make two different products such
as men’s suits and women’s suits, activities that are classified in two different NAICS United
States detailed industries. In general, receipts/sales and revenue data are used as a proxy to
determine primary activity for these establishments. The assumption is that the activity
generating the most receipts is also the activity using the most resources and most indicative of
the production process.
In some cases, however, these combined activities have been assigned to a specific NAICS
industry. Most of these activities involve either the sale and repair of goods or the sale and rental
of goods in the same establishment. For example, establishments that both sell automobile parts
and repair automobiles are classified in NAICS 44131, Automotive Parts and Accessories Stores,
and music stores that both sell and rent musical instruments are classified in NAICS 45114,
Musical Instrument and Supplies Stores. In other cases, specific industries are identified for these
combined activities, such as NAICS 44711, Gasoline Stations with Convenience Stores.

Classification rules related to the agreement to permit individual country detail at the six-digit
level for NAICS sometimes result in less comparable NAICS industries at the five-digit level and
above. For example in NAICS, the assignment of the industry code is at the most detailed level
of the classification (the six-digit U.S. detail code), except for Agriculture. That is, if the value of
an establishment’s production consists of 30 percent from computers, 30 percent from computer
storage devices, and 40 percent from semiconductors and related devices, it is classified in U.S.
detail industry 334413, Semiconductor and Related Device Manufacturing, that is aggregated to
NAICS 33441, Semiconductor and Other Electronic Component Manufacturing, the level that
comparable information is shown for all three countries.

If the classification for the above
example were at the five-digit NAICS level, that establishment would be classified in NAICS
33411, Computer and Peripheral Equipment Manufacturing. There would then be more
comparable information at the NAICS level, but it would be impossible to classify this
establishment to a U.S. detail six-digit industry.
In Agriculture, however, NAICS coding begins at the top of the structure and continues down
to the most detailed level (the six-digit U.S. detail code).

The existence of a 50 percent rule in
Agriculture and the presence of combination industries based on families of related agricultural
products with none accounting for 50 percent or more of production require a top down coding
procedure rather than coding at the most detailed level first as is done in the balance of the
classification.

Use of Reporting Units Other than Establishments:

NAICS is based on the economic principle that establishments should be grouped together
based on their production processes. The NAICS definition of the establishment ensures that, at
some level, “establishments”: (1) identify the most refined (generally smallest) individual entity
possible; (2) can provide the information needed when surveying economic activity; and (3)
when aggregated, approximate the statistical universe of economic activity. Each economic
survey program, in practice, determines whether the establishment is the most appropriate

reporting unit to meet the three criteria listed above with respect to the program’s objectives. If
not, an alternative reporting unit is identified.
For example, an economic survey of employment or wage data may choose the
establishment—generally a physical location—as the reporting unit. Physical locations generally
have records for the number of employees and their wages readily available. Therefore, it is
reasonable to expect that separate wage and employment data are available for each switching
station in a multiunit telecommunications carrier enterprise and the physical location is a logical
choice for the reporting unit.
If the economic survey collects output data, the individual switching stations would not have the
total number of telephone calls or a complete accounting of inputs and outputs of the multiunit
telecommunications carrier. If a telephone call is routed through three different switching stations
and the price is determined at a fourth location, all of the related locations would need to be merged
into an alternative reporting unit to measure the volume and value of the output. In this case, the
physical location is not an appropriate reporting unit. The level of aggregation of physical units
required to create reporting units will vary greatly depending on the business activity being studied.
To efficiently define reporting units, statistical surveys need to evaluate the characteristics of the
activities being studied and the organizational structure of the entities producing goods or services.
In some cases, the physical location is appropriate, sometimes units will need to be grouped based
on homogeneous production characteristics or geographical groupings, and in other cases, the
enterprise (company) may form the most appropriate reporting unit.
The practical variation in reporting unit definitions affects comparability of data. A count of
units defined as physical locations will be different from a count of units defined based on the
need for complete input and output records in the telecommunications industries. It is critical
that each data provider clearly identify the reporting unit definition used when presenting
summary statistics. The analysis of statistical data from a variety of sources requires the
transparency of clearly defined reporting units.
While the reporting unit definition can vary, NAICS is a classification system for
establishments and is based on grouping establishments with similar production function
characteristics.

Comparison of NAICS to the International Standard Industrial Classification of All
Economic Activities (ISIC):

Recognizing the need for international comparability of economic statistics, the United
Nations (UN) first adopted an International Standard Industrial Classification system in 1948.
Revisions to the ISIC structure and codes were adopted by the UN’s Statistical Commission in
1958, 1968, 1989, 2002, and 2007.2
Similar to NAICS, ISIC was designed primarily to provide classifications for grouping activities
(rather than enterprises or firms), and the primary focus for the ISIC classification system is the kind
of activity in which establishments or other statistical entities are engaged. The main criteria
employed in delineating divisions and groups (the two- and three-digit categories, respectively) of
ISIC are: (a) the character of the goods and services produced; (b) the uses to which the goods and
services are put; and (c) the inputs, the process, and the technology of production.

2
International Standard Industrial Classification of All Economic Activities, Statistical Papers, Series M, No. 4,
Rev. 4, United Nations, New York, 2008.
INTRODUCTION 23
census.gov/naics
The third classification criterion of the ISIC is the conceptual foundation of NAICS, and thus,
NAICS is aligned more closely with ISIC than was the 1987 SIC system. However, there are
differences between the NAICS and ISIC classification schemes. Most important, perhaps, is the
single (production process) conceptual framework of NAICS. As noted elsewhere, this is unique
among industry classifications.
ISIC, Rev. 4, groups economic activity into 21 broad Sections, 88 Divisions, 238 Groups, and
420 Classes. In the coding system, Sections are distinguished by the letters A through U, and the
Divisions, Groups, and Classes are identified as the two-digit, three-digit, and four-digit
groupings, respectively. As was the case with 2007 NAICS, the most recent revision of ISIC also
focused on improvements to the detail in services sections.
In the development and subsequent revision of NAICS industries, the statistical agencies of
the three countries strove to create industries that did not cross ISIC two-digit boundaries. The
2007 revisions of the NAICS and ISIC increased comparability beyond previous levels. Similar
to the 2012 NAICS revision, this 2017 NAICS revision maintains a similar level of
comparability with ISIC, Rev. 4.

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