Kevin L. Kliesen

English

Research Papers in Economics

NationalEconomicTrends
August 2001
The Switch to NAICS
Measuring economic activity when the composition
and quality of goods and services being produced is
rapidly changing presents a perpetual challenge.
Accordingly, U.S. statistical agencies periodically adopt
new methods or sources for measuring economic activity.
Recent changes include the switch from fixed-weighted
price indexes to chain-weighted indexes in the National
Income and Product Accounts (NIPA) in January 1996
and the classification of software as a final good (fixed
investment) into the NIPAs in October 1999. 
U.S. data are currently undergoing another sweeping
change with the switch to the new North American
Industry Classification System (NAICS), which replaces
the old Standard Industrial Classification (SIC) system.
According to the U.S. Census Bureau:
New NAICS industries catalog the many ways
our economy has changed.  Some recognize “high-
tech” developments such as fiber optic cable manu-
facturing, cellular telecommunications, and computer
software reproduction.  Some reflect new business,
like paging and environmental consulting.  Still oth-
ers account for changes in the way business is done,
like bed-and-breakfast inns, warehouse clubs, tele-
marketing bureaus, and credit card issuance.
1
The key difference between the NAICS and the SIC
system is the organizing principle of the data collection
process.  Under the SIC methodology, which remained
largely unchanged since its inception in the 1930s, the
data were organized principally to measure output,
employment, prices, and productivity in the manufac-
turing sector.  But with the rise of new services indus-
tries, manufacturing output has become a proportion-
ately smaller share of total output.  Another problem 
is that establishments with very different production
processes might be grouped together.  For example,
firms providing certain services to a manufacturer
would be classified as manufacturing.  Under NAICS,
only firms with identical or similar production processes
are lumped together.
The transition to the NAICS, which will occur in
stages, will affect virtually all nonfinancial data used
by economists and forecasters.  For example, the
Federal Reserve Board will start reporting measures of
industrial production and capacity on an NAICS basis
later this year or early next year, while the Bureau of
Labor Statistics (BLS) will begin reporting the monthly
employment statistics and producer price indexes on an
NAICS basis in 2003 and 2004, respectively.  But per-
haps the most complicated, and potentially nettlesome
transition, will occur with the NIPAs.  
According to the Bureau of Economic Analysis (BEA),
NAICS will not be fully implemented into the NIPAs
until 2003.  This process got underway in July 2001,
when the BEA classified detailed inventory estimates on
a NAICS basis; the aggregate values did not change.
Converting industry estimates of output will take a little
longer.  Moreover, because some industry source data
will be reported to the BEA on a NAICS basis, the BEA
will need to convert all data back to an SIC basis during
the transition.  Another potential complication is the dis-
continuities that arise with breaks in the series.  At pre-
sent, data using the NAICS methodology only extend
back to January 1992.  Prior to that, data will still be
based on the old SIC system.  
This data splicing presents a potential problem for
economists and other analysts accustomed to using long
time series of this data.  In all likelihood, though, the
problems will most often arise when looking at disaggre-
gated data, since substantial reclassification of firms will
occur.  But these types of problems have occurred before.
For example, the BEA’s gross industry output for 1977 to
1987 uses SIC 1972 industry benchmarks, while data for
1987 to 1999 use SIC 1987 benchmarks.
—Kevin L. Kliesen
1 http://www.census.gov/epcd/www/pdf/naicsdat.pdf
Views expressed do not necessarily reflect official positions of the Federal Reserve System

The switch to NAICS

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The switch to NAICS

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