What Is the North American Industry Classification System?
The North American Industry Classification System (NAICS) is a business classification system developed through a partnership among the United States, Canada, and Mexico. This classification system facilitates the comparison of statistics of all business activities across North America. Companies are classified and separated into industries that are defined by the same or similar production processes. This system should not be confused with the National Association of Insurance Commissioners (NAIC) or the National Association of Investors Corp. (NAIC).
Understanding the North American Industry Classification System (NAICS)
The NAICS was established to replace and modernize the U.S. Standard Industrial Classification system. The new system enables easier comparison of all countries in North America. To ensure the NAICS continues to be relevant, there is a planned system review every five years.
The History of the NAICS
The NAICS is a collaborative effort. The three parties responsible for the formation and continued maintenance of the NAICS are the Instituto Nacional de Estadistica y Geografia in Mexico, Statistics Canada, and the United States Office of Management and Budget through its Economic Classification Policy Committee, staffed by the Bureau of Economic Analysis, Bureau of Labor Statistics, and the Census Bureau.
The first version of the classification system was released in 1997. A revision in 2002 included substantial changes to the construction, wholesale trade, retail trade, and information sectors. In 2012, there was a slight reduction in the number of industries in the system and modifications were made to some of the system’s sector classifications. The latest revision, which occurred in 2017, reduced the number of industries from 1,065 to 1,057. Changes in size standards were also included in the revision, with six sectors of industries affected.
NAICS Coding System
The NAICS classification system allows for more flexibility than the four-digit structure of the SIC. It uses a hierarchical six-digit coding system, classifying all economic activity into 20 different industry sectors. Five of these sectors are primarily those that produce goods while the remaining 15 sectors provide some type of service. Every company receives a primary NAICS code, indicating its main line of business. This primary code is determined by the code definition that generates the largest revenue for a company at a specified location in the past year.
NAICS codes are narrowed from 20 sector codes into 99 three-digit subsector codes, further divided into 311 four-digit industry codes, subdivided into 709 five-digit industry codes, and ultimately broken down into 1,057 six-digit NAICS codes.
Reading a NAICS Code
The first two digits of a NAICS code indicate the largest business sector in which a company operates. The third digit designates the company’s subsector, and the fourth digit indicates the industry group to which the company belongs. The fifth digit of the code reflects the company’s particular industry of operation. The sixth and final digit designates the company’s specific national industry. Soybean farming, for example, has the NAICS code 111110, which is broken down to sector 11, subsector 111, industry group 1111, industry 11111, NAICS code 111110.