NAICS and economic data
The Census Bureau finally released its long awaited revision of the manufacturing and trade figures in its new classification code: NAICS - North American Industry Classification System. This takes the place of the old SIC codes (U.S. Standard Industrial Classification). This change has been in the works for many years - and in fact was discussed with much fanfare in mid-1998. I described the basics of the switch in my book, Using Economic Indicators to Improve Investment Analysis, 2nd Edition, which was published in late 1998. The switch was to begin 1999. In any case, here we are in 2001 and the NAICS is now upon us.

Why switch from SIC to NAIC? The U.S. Census Bureau cites four factors that make the complex change worthwhile. First, the NAICS identifies new, emerging and advance technology industries, which are more relevant to the current economic environment. Furthermore, these industries are reorganized into more meaningful sectors, particularly in the service-producing segment of the economy. Second, NAICS was developed in conjunction with Mexico and Canada so that statistics are more comparable for the NAFTA partners. Third, the defined industries are grouped according to a consistent principle: businesses that use similar production are grouped together. Finally, NAICS is more adaptable than the old SIC codes because it uses 6 digit classifications rather than only four digit. The higher degree to which industries are segmented, the easier it will be in the future to shift industries among sectors at a later date if the economic environment is changing. To keep up with economic change, the NAICS will be reviewed every five years. The higher degree of segmentation allows more flexibility over time.

Short-term disadvantages should not be discounted. The biggest disadvantage to a change of this magnitude is that some historical series are truncated. Given that the series for the NAICS classification was based on the 1997 Economic census, we have data going back nearly five years. However, for the new series that were created, and certain old series that were segmented into different industry classifications, we will not have a long enough time series to produce even one business cycle. Clearly, greater flexibility in segmenting sectors that are more relevant for a changing economy outweighs these costs. But they need to be considered.

In some cases, the switch in classification will go unnoticed. After all, if you are monitoring manufacturers' durable goods orders, the series will be the same. But the sectors within durable goods will have some minor and major changes. It will take time to become familiar with the new classification system.

A major problem will occur in that the manufacturing data coming from the Census will not correspond directly to the manufacturing data in the employment situation's nonfarm payrolls, nor industrial production because of the lag in the adoption of NAICS by the other statistical agencies. Furthermore, the data will also have to be tweaked by the Commerce Department when they compile quarterly GDP figures. This is not an insignificant issue. It will make the compiled figures more prone to error.

The immediate impact on durable goods appears minor. The large industry sectors within advance durable goods are seeing only minor changes. For instance, at Econoday, we have reported regularly on four industry groups: primary metals, industrial machinery, electrical machinery and electronic products, and transportation equipment. We will continue to focus on four major industry groups. However, instead of electrical machinery and electronic products, the new classification is called "computers and electronic products." This gives greater importance to a sector that has increasingly gained weight in the production process. This will serve as a better indicator within the high tech sector than was previously available. When the complete manufacturing shipments, inventories and orders figures are available, the classifications here will also give us more insight into economic behavior in the industrial sector. For instance, we will be able to add a new category for new orders focused on "information technology." This was not previously available.

Retail sales will also be affected in the next month. The restaurant component of retail sales, which accounts for about 10 percent of the total, will be removed from retail trade. Initially, the Census will report the monthly data as "Retail sales and Food Services". The Food Services is part of Accommodation and Food Services, which also includes lodging. The lodging component was removed from the service sector.

The table below shows the relationship between the NAIC and SIC classifications.

Evelina M. Tainer, Chief Economist, Econoday