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South Dakota e-Labor Bulletin

April 2022

NAICS: Reflecting Dynamics of the Economy

Recurring changes in our dynamic economy have necessitated a revision to the North American Industry Classification System (NAICS).

NAICS is updated every five years to reflect changes in the industrial structure of North American economies. The 2022 revision represents the fifth iteration of the classification system since it was first introduced. In 1997, the U.S. Office of Management and Budget (OMB) announced its decision to adopt the NAICS (pronounced “nakes”) as the industry classification system used by statistical agencies of the United States.

NAICS replaced the Standard Industrial Classification (SIC). The SIC system was developed in the 1930s at a time when manufacturing dominated the U.S. economic scene. There were numerous revisions to the SIC system over its lifespan, reflecting the economy's changing industrial composition. New developments in information services, new forms of health care provision, expansion of services and high-tech manufacturing began to reshape the economy during the 1990s. The SIC system was not conducive for studying these extensive industrial changes. Rapid changes in both the U.S. and world economies brought the SIC under increasing criticism and facilitated the need for a new classification system to better classify businesses according to their economic activity.

NAICS was developed jointly by the United States, Canada and Mexico to provide new comparability in statistics about business activity across these North American countries. The three initially partnered to form the North American Free Trade Agreement (NAFTA). This trilateral trade bloc created a free-trade zone among these nations. The agreement has since been replaced by the United States-Mexico-Canada Agreement (USMCA).

NAICS represents one of the most profound changes for statistical programs focusing on emerging economic activities. NAICS, developed using a production-oriented conceptual framework, groups establishments into industries based on the activity in which they are primarily engaged. Establishments using similar raw material inputs, similar capital equipment and similar labor are classified in the same industry. In other words, establishments which do similar things in similar ways are classified together.

The purpose of the five-year revisions is to ensure NAICS accurately reflects changes in the industrial structure of the North American economies. NAICS provides a tool to ensure economic statistics reflect the shifting economy. Every sector of the economy is restructured and redefined as needed.

NAICS uses a six-digit hierarchical coding system to classify all economic activity into twenty industry sectors. Five sectors are mainly goods-producing sectors, and 15 are services-providing sectors. This six-digit hierarchical structure allows greater coding flexibility than the four-digit structure of the SIC. NAICS is used by federal statistical agencies to collect and publish data by industry. The Quarterly Census of Employment and Wages (QCEW) program [(a federal-state cooperative program under the U.S. Bureau of Labor Statistics, (BLS)] is the caretaker for ensuring NAICS codes are accurately applied to all South Dakota establishments.

The 2022 NAICS revisions will impact approximately 2,800 establishments in South Dakota, or roughly 7% of business establishments in the state. The revisions will impact several sectors, primarily Retail Trade, Information, and Finance and Insurance. There were also some minimal changes in the Mining, Quarrying and Oil and Gas Extraction, Manufacturing, Wholesale Trade, and Other Services sectors.

NAICS 2022 Revisions at a Glance

There are four types of revisions for NAICS 2022:

1. Direct NAICS Changes: A direct change means a renumbering of a 2017 industry. All establishments in a 2017 NAICS industry will transfer directly to the new 2022 NAICS industry.
2. Direct Plus NAICS Changes: These changes regroup all of an existing 2017 industries with portions of other 2017 industries to form new 2022 industries.
3. Split NAICS Changes: A split change means a 2017 NAICS code is being broken apart into finer detail to create new 2022 industries.
4. Consolidated NAICS Changes: A consolidated change means NAICS codes are being rolled up or combined into a new 2022 code.

Examples of these NAICS code changes are illustrated in the following table.

A Closer Look at the Most-Affected Sectors

In large part, the 2022 NAICS revisions address the decreasing usefulness of employing the mode of delivery (online versus in store/print) as an industry criterion for the Wholesale Trade, Retail Trade, and Information sectors. The internet has developed from a specialized activity to a generic method of delivery for goods and services. The revisions to NAICS reflect a deemphasis on the delivery method as an industry function used in NAICS classification.

Electronic shopping and mail-order houses such as e-tailers or online retailers will no longer have their own stand-alone NAICS code; rather multiple codes will be used beginning in 2022. This industry is being updated to eliminate the distinction between physical stores and online stores given the increasing prevalence of internet usage and a generic method of delivery for goods and services. Industries will instead be distinguished between retailers specialized by broad product lines.  

Internet publishing, broadcasting and web search portals also will be split into multiple codes. With the internet regularly used as a method of distribution for publishing and broadcasting, the industry will be updated to distinguish between different types of publishers, broadcasting/media content providers, and web search portals. For example, online newspapers will have their own code, classified with newspaper publishers which includes publishing and printing.

Electronic book publishers will have their own code called book publishers, which encompasses print, electronic or audio forms or publishing exclusively on the internet. The web search portals industry will be grouped with all other information services. They will be defined as establishments operating web sites which use a search engine to generate and maintain extensive databases of internet addresses and content in an easily searchable format. These types of establishments often provide internet services such as email, connections to other websites and other limited content.

Prior to the latest NAICS revision, portfolio management and investment advice industries had their own NAICS codes but will be consolidated into one new NAICS code beginning in 2022. This industry will now comprise establishments primarily engaged in managing the portfolio assets (i.e., funds) of others on a fee or commission basis and/or providing customized investment advice to clients on a fee basis. Establishments providing portfolio management have the authority to make investment decisions, and they derive fees based on the size and/or overall performance of the portfolio. Establishments providing investment advice provide financial planning advice and investment counseling to meet the goals and needs of specific clients, but do not have the authority to execute trades. There are several illustrative examples such as managing trusts, portfolio fund managing, customized investment advisory services and mutual fund managing companies that are engaged in these activities and services.

NAICS is a unique business classification system based on grouping economic units which use similar processes. It is forward-looking and flexible and therefore can anticipate increasing globalization and provide enhanced industry comparability among the North American trading partners.

As the agency responsible for the QCEW program in South Dakota, we will continue to collect economic data and confirm NAICS codes are accurately applied to all establishments using the 2022 NAICS. This revision will be introduced with the release of first quarter 2022 QCEW data, which will be available sometime during August 2022. Find employment and wage data from the QCEW program.