NAICS: Everything You Need to Know

You’ve heard all about SICS, but what about NAICS? In this article, we’ll tell you everything you need to know about NAICS.

What is a NAICS Code? 

NAICS stand for ‘The North American Industry Classification System’, it’s pronounced “NAKES” (rhymes with “SNAKES”), and is the standardised system used for classifying business establishments according to their primary type of economic activity.  

This classification system is used by federal statistical agencies in the United States, Canada, and Mexico to collect, analyse, and publish statistical data related to the business economy.  

The NAICS code for each establishment provides a detailed categorisation, facilitating comparability and consistency across North American business statistics.

A Brief History of NAICS 

The NAICS was developed to replace the older Standard Industrial Classification (SIC) system, which is still widely used in the UK.

The SIC system was created in the 1930s and classifies companies based on their primary activity to promote comparability of economic data. Despite periodic changes, the SIC system struggles to keep up with rapid economic changes and globalisation.

In response to these challenges, the U.S. Office of Management and Budget (OMB) initiated a comprehensive review of the economic classification system in the early 1990s.  

This led to the creation of the Economic Classification Policy Committee (ECPC) and the subsequent development of NAICS in collaboration with Statistics Canada and Mexico’s Instituto Nacional de Estadistica y Geografia (INEGI).  

NAICS was officially adopted in 1997, offering a more modern and detailed classification system that aligns better with modern economic activities and international standards.
 

Structure of NAICS Codes

NAICS codes have a hierarchical structure that can range from five to six digits at the most detailed industry level, providing a flexible and detailed approach to categorising business activities.

Using a six-digit coding system allows for a finer distinction between different types of economic activities compared to the four-digit structure of the SIC system.

Here is how the hierarchy is organised:

• Sector: Represented by the first two digits, it designates the largest business sector. 

• Subsector: The third digit indicates the specific subsector within the larger sector. 

• Industry Group: The fourth digit represents the industry group. 

• NAICS Industry: The fifth digit designates the specific NAICS industry. 

• National Industry: The sixth digit identifies the national industries. 

For example, the code for Artificial intelligence is 541715. Breaking it down: 

• Sector (54): Professional, Scientific, and Technical Services 

• Subsector (541): Professional, Scientific, and Technical Services 

• Industry Group (5417): Scientific Research and Development Services 

• NAICS Industry (54171):  Research and Development in the Physical, Engineering, and Life Sciences 
• National Industry (541715): Research and Development in the Physical, Engineering, and Life Sciences (except Nanotechnology and Biotechnology)  

NAICS covers 20 primary sectors, further divided into 96 three-digit subsectors, 308 four-digit industry groups, 689 five-digit industries, and 1,012 six-digit national industries. Only one NAICS code is allowed for each company and it must be based on its primary activity. 

Structure Definitions

Accuracy of NAICS Codes 

NAICS codes are reviewed and updated every five years to ensure they remain relevant and accurate in reflecting the changing economy.  

This periodic review process involves soliciting public comments and consulting with stakeholders in the United States, Canada, and Mexico to ensure that any changes maintain comparability across the three countries. 

Like the SIC system, the NAICS system is designed for self-assignment, meaning businesses can select the code that best represents their primary activity. This means the accuracy of a NAICS code depends on the careful selection and application by the business itself.

Limitations of NAICS

Whilst NAICS are slightly better than the SIC system there are still some limitations…

Outdated updates: NAICS codes are only updated every five years, which means they often miss rapidly changing industries and emerging sectors. This can lead to outdated classifications that don’t accurately reflect current economic landscapes.

Granularity: While NAICS provides detailed categorisation, it may not offer enough granularity for niche or highly specialised industries. This can make it difficult to accurately classify businesses operating in very specific or emerging fields. 

Manual classification: The process of assigning NAICS codes can be subjective and prone to human error. Businesses self-report their codes, which can lead to inconsistencies and inaccuracies if not carefully managed. 

Inflexibility: Once assigned, NAICS codes are not easily changeable. Businesses that evolve or diversify into new sectors may find their original codes no longer accurately reflect their activities. 

Complex hierarchy: The hierarchical nature of NAICS can be complex and clumsy to navigate, especially for users who need to cross-reference multiple industries or understand intricate economic relationships. 

The Data City created Real-Time Industrial Classifications (RTICs) by combining real-time data, advanced analytics and working continuously with our sector experts, we offer a superior classification system that enhances the accuracy and relevance of classification codes and reflects the most current emerging sectors and economic activities. 

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