Definition
The North American Industry Classification System (NAICS) is a statistical standard used primarily by governmental agencies in Canada, Mexico, and the United States for business and economic data analysis and reporting. It is designed to classify business establishments and companies into sectors and industries according to how they primarily engage in economic activities. The system helps to facilitate the collection, analysis, and publication of statistical data related to the business economy.
Phonetic
The phonetics of the keyword North American Industry Classification System (NAICS) would be “En-ay-ay-see-es” or “ˈɛneɪˌaɪsiːɛs”.
Key Takeaways
- The North American Industry Classification System (NAICS) is an industry classification system developed by the statistical agencies of Canada, Mexico, and the United States. It was introduced in 1997 to replace the Standard Industrial Classification (SIC) system.
- NAICS is used to categorize businesses and collect statistical data related to the U.S. economy. The classification system arranges industries into sectors based on the primary business activities of the establishments. It’s a comprehensive, innovative approach that reflects the nature of the changing economy.
- Each NAICS code consists of six digits, organized into a hierarchical structure. The first two digits represent the broadest business sector. As we advance from the third to the sixth digit, the code becomes more specific and indicates the types of goods or services a company provides in detail. Refreshed every 5 years, it reflects the continuous changes in economic phenomena and its structure within industries.
Importance
The North American Industry Classification System (NAICS) is crucial in business and finance because it standardizes and simplifies the analysis, comparison, and understanding of industry statistics across North America. Developed by the United States, Canada, and Mexico, this system offers a clear, consistent framework for classifying businesses and industries, based on the primary services or goods they produce. This makes data comparison more efficient and accurate. NAICS also aids government agencies in collecting, analyzing, and publishing statistical data related to the U.S. business economy. It’s a valuable tool for businesses as well, as it provides a means to identify and understand market trends, leading to more informed decision-making and strategic planning.
Explanation
The North American Industry Classification System (NAICS) serves a vital role in the organization and presentation of economic statistics across various sectors. The primary purpose of the NAICS is to collect, analyze, and publish statistical data related to the U.S, Canadian, and Mexican economies. This consistent and comprehensive classification system allows for a high level of compatibility in business statistics among the three countries, promoting smoother business operations and easier understanding of economic data.NAICS is widely used for several purposes including economic research, tax regulation development, and market analysis. It provides a functional tool for government agencies and businesses to better understand the economic landscape, track business activity, identify business trends, and make informed decisions. For businesses, knowing where they fall within the NAICS system can help them understand their industry’s trends, assess their competition, and make strategic choices about growth and investment. Government agencies use NAICS codes to offer market-specific regulatory guidance and to provide accurately targeted funding or support. Overall, the NAICS makes economic data more accessible and applicable for a broad range of stakeholders.
Examples
1. Manufacturing Sector: For instance, Boeing, a prominent aerospace company, falls under the NAICS code 33641 for aerospace manufacturing. This code pertains to establishments primarily engaged in manufacturing complete aircraft, missiles, or space vehicles, as well as those businesses involved in developing and creating prototypes of these kinds.2. Retail Sector: Walmart, the multinational retail giant, is classified under NAICS code 445110 for Supermarkets and Other Grocery (except Convenience) Stores. This code describes businesses mainly involved in retailing a general line of food, including canned, dry, and frozen foods, and fresh fruits and vegetables.3. IT Sector: Tech giant Google is classified under NAICS code 519130 for Internet Publishing and Broadcasting and Web Search Portals. This classification applies to establishments primarily engaged in publishing and/or broadcasting content on the Internet exclusively, web search portals, and data processing services. These establishments do not provide traditional (non-Internet) versions of the content, events, or information they publish or broadcast.
Frequently Asked Questions(FAQ)
What is the North American Industry Classification System (NAICS)?
NAICS is a system developed by the U.S., Canada, and Mexico to classify businesses into specific industry sectors. It’s used by various government agencies and organizations to collect, analyze, and publish statistical data related to the economy.
What is the purpose of the NAICS?
The main purpose of NAICS is to facilitate the collection, analysis, and publishing of statistical data related to the business economy.
How often is the NAICS updated?
The NAICS manual is reviewed and updated every five years to reflect changes in the economy.
How is NAICS different from the Standard Industrial Classification (SIC)?
NAICS uses a six-digit code which allows for finer granularity in the classification system compared to the old four-digit SIC codes. Also, unlike the SIC system, NAICS is designed to reflect the North American Free Trade Agreement’s integrated economy.
How are industries classified under the NAICS?
NAICS classifies industries based on the process used to produce goods or services. It uses a hierarchical system, wherein the broadest level includes 20 sectors. As numbers progress, they denote more specific industry sectors, subsectors, industry groups, and specific industries.
Where can I find my business’ NAICS code?
You can look up your NAICS code on the U.S. Census Bureau’s NAICS search tool.
Is the use of NAICS codes mandatory for my business?
While it is not mandatory for every business, many Federal government agencies, such as the Bureau of Labor Statistics, require businesses to use NAICS codes for statistical purposes. Also, lenders and insurers may require a NAICS code for licensing and other administrative procedures.
Can a business have more than one NAICS code?
Yes, a business can have more than one NAICS code if it operates in different industries. The primary NAICS code, however, typically reflects the activity that generates the most revenue for the company.
Related Finance Terms
- Industry Classification
- Sector Codes
- Economic Analysis
- Statistical Agencies
- Market Segmentation
Sources for More Information
