What Is Standard Industrial Classification (SIC)?
The Standard Industrial Classification (SIC) is a system for classifying businesses and industries by a four-digit code, used to standardize economic data for statistical purposes across various government agencies. As a form of industry classification, the SIC system organizes establishments based on their primary economic activity, allowing for consistent collection, analysis, and presentation of economic statistics. Each digit in the four-digit SIC code represents a progressively more detailed level of industry categorization.
History and Origin
The SIC code system originated in the United States in the late 1930s. It was developed by the U.S. Bureau of the Budget (now the Office of Management and Budget) with the aim of creating a standardized method for classifying businesses for economic censuses and government statistical reports. The first official edition was published in parts between 1938 and 1940. Over the decades, the Standard Industrial Classification system underwent several revisions to reflect changes in the economy, with the last major revision occurring in 1987. Its primary purpose was to promote the comparability of establishment data across various facets of the U.S. economy.5
In 1997, the U.S. Census Bureau, in conjunction with Statistics Canada and Mexico's Instituto Nacional de Estadistica y Geografia, introduced the North American Industry Classification System (NAICS) to replace the SIC system. This new system was designed to allow for a higher level of comparability in business statistics across North America.4 While NAICS has largely superseded SIC for federal statistical purposes, the SIC system's legacy continues in certain applications.
Key Takeaways
- The Standard Industrial Classification (SIC) is a four-digit numerical system for classifying industries.
- It was developed in the United States in the late 1930s to standardize economic data collection.
- Each digit in a SIC code provides a more specific level of industry detail.
- The SIC system has largely been replaced by the North American Industry Classification System (NAICS) for federal statistical purposes.
- Despite its replacement, SIC codes are still utilized by some government departments, private organizations, and for historical financial analysis.
Formula and Calculation
The Standard Industrial Classification (SIC) system does not involve a mathematical formula or calculation. Instead, it is a hierarchical classification system where businesses are assigned a code based on their primary economic activity. The assignment of a SIC code is a descriptive process, not a quantitative one. It involves identifying the main product or service an establishment provides and then matching that activity to the most appropriate four-digit code within the established SIC framework.
Interpreting the Standard Industrial Classification (SIC)
Interpreting a Standard Industrial Classification (SIC) code involves understanding its hierarchical structure. The four-digit code systematically breaks down an industry, moving from a broad category to a very specific one.
- First two digits: These identify the "major group" of the industry, representing the broadest classification. For example, 20-39 represents manufacturing, and 70-89 covers services.
- Third digit: This further refines the major group into a more specific "industry group."
- Fourth digit: This provides the most detailed classification, identifying a specific "industry."
For instance, a company with SIC code 7372 would be interpreted as:
- 73: Business Services (Major Group)
- 737: Computer Programming, Data Processing, and Other Computer Related Services (Industry Group)
- 7372: Prepackaged Software (Specific Industry)
Understanding a company's SIC code allows analysts to categorize firms, conduct market research, and perform competitive analysis by grouping entities with similar operational focuses.
Hypothetical Example
Consider a new company, "GreenThumb Landscaping Inc." To determine its Standard Industrial Classification (SIC) code, one would look for the primary economic activity from which it generates most of its revenue. Since GreenThumb Landscaping Inc. provides lawn care, tree pruning, and garden design services, its primary activity falls under landscaping.
By consulting the SIC manual or an online lookup tool, the process would typically involve:
- Identify the broad division: Services (Major Group 70-89).
- Narrow down the major group: Within Services, look for categories related to personal or business services. Landscaping services are often grouped with agricultural services.
- Locate the specific industry: The SIC code for Landscaping Services is 0782.
Therefore, GreenThumb Landscaping Inc. would be assigned the SIC code 0782. This assignment allows analysts to compare GreenThumb with other companies in the landscaping sector, assess industry trends, and understand its position within the broader service economy.
Practical Applications
Despite its replacement by NAICS for many federal statistical purposes, the Standard Industrial Classification (SIC) system remains relevant in several practical applications:
- Financial Filings: The U.S. Securities and Exchange Commission (SEC) continues to use SIC codes for classifying companies within its EDGAR database. Publicly traded companies are often required to report their SIC code in their filings, which aids investors and analysts in categorizing and researching public companies. An individual can search the SEC's EDGAR database using a company's SIC code.3
- Business Licensing and Regulation: State and local governments, as well as various regulatory bodies, may still use SIC codes for business licensing, permitting, and regulatory compliance purposes.
- Marketing and Sales: Businesses use SIC codes to identify and target potential clients or suppliers within specific industries for market research and lead generation. This is particularly common in business-to-business (B2B) sales.
- Historical Data Analysis: Researchers and economists often rely on SIC codes for analyzing historical statistical analysis and industry data collected before the widespread adoption of NAICS. For example, the U.S. Bureau of Economic Analysis provides historical industry accounts data based on older SIC systems.2
- Credit Risk Assessment: Financial institutions may use SIC codes as part of their risk management framework to assess the creditworthiness of businesses within specific sectors, as industry performance can impact financial stability.
Limitations and Criticisms
While the Standard Industrial Classification (SIC) system provided a valuable framework for organizing economic data, it faced several limitations and criticisms that eventually led to its replacement. A primary concern was its outdated nature, particularly the 1987 revision, which struggled to adequately classify emerging industries in the rapidly evolving information technology and service sectors. The SIC system was developed during an era when manufacturing dominated the economy, and its structure did not fully capture the nuances of modern economic activities, especially those related to digital services and biotechnology.
Another significant criticism revolved around the classification of diversified companies. A single SIC code was assigned based on a company's primary activity, even if a significant portion of its revenue came from other, unrelated operations. This could lead to a misrepresentation of a firm's true business scope and make it challenging for equity research to accurately compare companies or for portfolio construction to achieve proper sector diversification. Furthermore, the inflexibility of the four-digit structure made it difficult to expand and adapt to new business models without significant overhaul. Some academic studies have highlighted how differences in industry classification schemes can significantly impact the results of financial analysis. The U.S. Bureau of Economic Analysis notes that historical data based on older SIC systems may not be consistent with current data that uses newer classification systems.1
Standard Industrial Classification (SIC) vs. North American Industry Classification System (NAICS)
The Standard Industrial Classification (SIC) system and the North American Industry Classification System (NAICS) are both hierarchical frameworks used to categorize businesses, but they differ significantly in their scope, structure, and underlying philosophy.
| Feature | Standard Industrial Classification (SIC) | North American Industry Classification System (NAICS) |
|---|---|---|
| Origin | United States (developed in the late 1930s) | Jointly developed by the U.S., Canada, and Mexico (adopted in 1997) |
| Primary Goal | Standardize U.S. government statistical data collection | Provide a common classification for North American economic statistics |
| Code Structure | 4-digit numerical code | 6-digit numerical code |
| Hierarchy | Divisions, Major Groups, Industry Groups, Industries | Sectors, Subsectors, Industry Groups, NAICS Industries, National Industries |
| Focus | Production-oriented, with a heavy emphasis on manufacturing | Production-oriented, designed to reflect new and emerging industries (e.g., IT) |
| Revisions | Last revised in 1987 | Reviewed and revised every five years |
| Current Use | Still used by some federal agencies (e.g., SEC), state/local, and private sectors; historical data | Primary system for federal statistical agencies in North America; widespread private use |
The core distinction lies in their design. SIC was more rigid and struggled to accommodate the growth of service and technology-driven industries. NAICS was specifically created to address these shortcomings, offering greater detail with its six-digit structure and a more flexible framework that is regularly updated to capture the evolving landscape of business cycles and globalized industries. While SIC codes remain in use for specific purposes, NAICS is the current standard for economic measurement in North America.
FAQs
What is the purpose of a Standard Industrial Classification (SIC) code?
The purpose of a Standard Industrial Classification (SIC) code is to categorize businesses by their primary economic activity. This standardization helps government agencies collect and analyze economic data consistently, and allows businesses and researchers to compare companies within the same industry.
How is a company assigned a SIC code?
A company is assigned a SIC code based on its principal line of business—the activity from which it derives the majority of its revenue. This involves matching the company's main products or services to the most appropriate four-digit code defined within the SIC system.
Is the SIC system still used today?
Yes, while the Standard Industrial Classification (SIC) system has been largely replaced by the North American Industry Classification System (NAICS) for federal statistical purposes, it is still used by certain government departments (like the SEC for financial filings), state and local agencies, and many private sector entities for purposes such as market research and historical data analysis.
What is the difference between SIC and NAICS?
The main difference is that SIC is an older, four-digit U.S.-centric system, last revised in 1987, that was more production-oriented. NAICS is a newer, six-digit system developed jointly by the U.S., Canada, and Mexico in 1997, designed to reflect modern economic activities and emerging industries more accurately, and it is regularly updated.
Why was SIC replaced by NAICS?
SIC was replaced by NAICS primarily because the SIC system, with its 1987 last revision, struggled to adequately classify new and rapidly growing industries, especially in the information and service sectors. NAICS provides a more detailed and flexible framework that better reflects the contemporary North American economy and facilitates comparability across the three signatory countries.