Transition to New Classification System Begins

Transition to New Classification System Begins

by: Nancy Brennan, Economist; Mike Evans, Former BLS Program Supervisor; and Krista R. Shinkle, Economist

adapted from the article, "The Coming Changes in Forest Industry Statistics, Comparisons Among NAFTA Nations Sought," written by Mike Evans in the Journal of Forestry, September 1997.

"NAICS focuses on how products and services are created, as opposed to the SIC focus on what is produced."

This article first appeared in the April 1997 issue of Trends to provide information on the upcoming classification changes in industry statistics. We begin the transition from the Standard Industrial Classification (SIC) system to the North American Industry Classification System (NAICS) by presenting second quarter 2001 and 2002 employment data for Wyoming. Eventually, all industry data reported in Trends will be in NAICS format. The updated reprint of “New Industrial Classification System Will Affect All Industry Statistics” should help you understand the differences between the SIC and NAICS classification systems.

The purpose of an industrial classification system is to group industries and categorize firms according to common characteristics, so that one can organize specific statistical information such as import/export, employment, tax revenues, and/or wage information. It can classify, or code, any business or establishment into an industry. The NAICS Administrative Committee, headed by the Office of Management and Budget (OMB), defined NAICS jointly with Canada and Mexico to obtain comparable economic and statistical information. Combining the three countries’ existing classification systems makes it possible to compare industry statistics among international, state, and local economies. Under the SIC system, one cannot make direct comparisons between countries.

The evolution of the SIC industrial classification system is nothing new. It has been revised every 10 to 15 years since its inception in the 1930s. The change from SIC to NAICS, however, represents a fundamental break with the past in certain industries. The new system gives special attention to new and emerging industries, especially those considered highly technological and other sectors that have similar production processes. NAICS will reflect the restructuring of the economies, especially to accommodate past and ongoing changes in the economic structure of the countries.

The use of NAICS makes substantial structural time series breaks in most industries. Time series breaks will affect projections and comparisons of statistics over time (i.e., comparing employment by industry in 2001 to 1991). This article shows the interrelationship between SIC and NAICS, and the changes taking place.

Differences Between the Two Systems

NAICS focuses on how products and services are created, as opposed to the SIC focus on what is produced. This approach yields significantly different industry groupings than SIC.

NAICS uses a six-digit code, while a four-digit code identified SIC industries. The first two digits of NAICS identify the general sector, while the third, fourth, and fifth digits are more specific to the operations of the sector. Each sector is divided into many groups and each group is separated further into specific production operations identified by five- and six-digit NAICS codes. For example, the Mining sector (two-digit) is divided into three groups (three-digit): oil & gas extraction; mining except oil & gas; and support activities for mining. The mining except oil & gas industry is divided into three more groups (four-digit): coal; metal ore; and non-metallic minerals, and so on (see Figure 1).

The NAICS Administrative Committee standardized the first five digits of the NAICS code between countries striving for compatibility at the two-digit level with the International Standard Industrial Classification (ISIC).¹ The sixth digit is used to identify subdivisions to satisfy user needs in individual countries. Provided that one meets other measurement standards (i.e., monetary exchange rates), one could make direct comparisons among the three national economies.

Effects of Transition on All Industries

Table 1 bridges the two systems and compares all major industries between the one-digit SIC Code² and the two-digit NAICS Code.³ OMB developed the NAICS system for compatibility with the SIC system, although the numerical codes will always change.

NAICS groups economic activities into 21 sectors, up from the 10 major divisions in the SIC system The total number of industries increased to 1,179, compared with 1,004 under the SIC system. The 1987 SIC system left three-quarters of all firms by industry unchanged from the previous classification system of 1972; NAICS will leave two-thirds unchanged compared with the SIC system, but they will be re-numbered, re-labeled, and described differently.

More than one-third of the industries formerly coded in the SIC system will be split into new NAICS designations. Series disruptions could affect a total of 511 industries and cause comparisons between 2001 and 2002 economic activity to be distorted. Some industries will have time series breaks in the data greater than three percent of the 1992 value of output for the 1987 industry.⁴ There are a total of 256 industry breaks for all industries. These time series breaks not only cause statistical disruptions for the users in the industries redefined, but in the broad sectors that we use to describe our economy.

When changing from SIC to NAICS, there are a total of 361 new industries not previously recognized separately, while 661 industries are directly matched and 344 industries split into various sectors. Often, differences in employment between NAICS and SIC are not due to firms having changed their primary industrial activity, but due to the different coding assignments, which cause time series breaks even when the new system directly matches the SIC system.

Solutions & Conclusions

The past approach to preserving time series (e.g., SIC change in 1987) after classification system revisions is to create linkages at the firm level where the series breaks. Producing a dual data series will create linkages using both the SIC and new classifications for a given period of transition, enabling one to cross-reference NAICS and SIC. We can assess the full impact of the revision, with the dual classifications of data.

We see the conversion from the SIC system to NAICS as an important step in providing a strong foundation for statistical information in coming decades. Nonetheless, the immediate challenge is to help the users of the data become familiar with new industry groupings and deal with the series breaks over time.

¹Carole A. Ambler, Bureau of the Census, Services Division, An Update on the Development of the North American Industrial Classification System (NAICS), October 1995.

²U.S. Office of Management and Budget, Standard Industrial Classification Manual, 1987.

³U.S. Office of Management and Budget, “Economic Classification Policy Committee: SIC Replacement—NAICS Proposed Industry Classification Structure,” Federal Register, Volume 61, 1996.

⁴Paul T. Zeisset and Mark E. Wallace, Bureau of the Census, Economic Planning and Coordination Division, How Will NAICS Affect Data Users?, October 1996.

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Last modified on by Krista R. Shinkle.