What Are NAICS Codes?

by George N. Root III - Updated September 26, 2017

The United States government uses economic indicators to relay the condition of the economy to the public and to the rest of the world. In order to keep track of activity within the various business sectors in the U.S., the government uses a set of industrial codes that classify each business sector. This set of codes is known as the NAICS standard.

Identification

NAICS stands for North American Industry Classification System, and it is the standard created by the United States Census Bureau to help collect information on the American economy and how the various industrial sectors affect the economy. It was set in conjunction with the governments of Mexico and Canada.

History

For many years the United States had used the Standard Industrial Classification, or SIC, system of categorizing American businesses. The government replaced the SIC standard with NAICS in 1997. This shift arose from the 1991 International Conference of Classification of Economic Activities, held in Williamsburg, Virginia, at which several nations indicated that the previous standard was not a reliable way to compare economic data among countries. One of the main complaints was against the four-digit structure of the older standard, which led to misleading economic data. In America the business services sector is larger than manufacturing, but the past standard consistently identified manufacturing as larger, and this caused confusion.

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Types

The NAICS classification system is set up in a much different way than the SIC codes. The SIC codes were four-digit codes that were attached to a particular industry, and each company was required to find a code that matched its business activity as closely as possible. NAICS uses a two-digit number to identify an industry. Within that industry is a six-digit code that identifies the specific business the company is engaged in. The first two digits of the six-digit classification is the two-digit industry code.

Significance

When the government issued the new NAICS standard, it discontinued the use of SIC codes. Those codes are still in use by some states and municipalities, but the federal government no longer acknowledges the SIC codes when collecting business data.

Considerations

The NAICS codes are monitored and administered by the U.S. Census Bureau, but there is no one agency within the government that is given the responsibility creating new codes. They are created by various federal government agencies based on the needs of each agency, and then they are sometimes submitted to the Census Bureau to be included in the list of NAICS codes. It is possible to get a code from a government agency that does not appear on the commonly used list. While the government attempts to use a comprehensive classification list, the various agencies are allowed to create a code based on their own specifications.

About the Author

George N. Root III began writing professionally in 1985. His publishing credits include a weekly column in the "Lockport Union Sun and Journal" along with the "Spectrum," the "Niagara Falls Gazette," "Tonawanda News," "Watertown Daily News" and the "Buffalo News." Root has a Bachelor of Arts in English from the State University of New York, Buffalo.

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