What does every business need but not every industry has?

Sally Herships (0:01)

N-P-R.

Every five years, a sort of Olympics of government data collecting happens. Kind of. It's when changes to the Naics codes are awarded, and that time is coming up. But what are Naics codes?

Wailin Wong (0:19)

Can't believe you don't know, Sally.

Sally Herships (0:21)

Just kidding. I'm a fellow econ nerd. It stands for North American Industry Classification System. They're what we use to categorize industries, like 114 for fishing, hunting, and trapping, or mining, 212, but not for oil and gas, which has its own code. Their main purpose is to monitor economic activity.

Wailin Wong (0:42)

The BLS and economic census use Naics. Government contracts are awarded based on Naics. There's a lot of money at stake. But if an industry doesn't have a code, it's a problem.

Darren Hudima (0:53)

You can't make good decisions about an industry that you can't measure.

Wailin Wong (0:58)

This is The Indicator from Planet Money. I'm Wayland Wong, here with friend of the show, Sally Herships. Welcome back, Sally.

Sally Herships (1:04)

Thank you so much.

Wailin Wong (1:05)

Today on the show, we go behind the scenes to learn about Naics codes. We look at who applies, how they do it, and the consequences of not having a code.

Sally Herships (1:18)

If you want to talk about economic classification systems, there's really no better place to start than with a business reference librarian.

Meet Georgetown University's Jennifer C. Boettcher.

Jennifer C. Boettcher (1:30)

Yeah, I wish I would have gotten questions from you because I can talk hours on this topic.

And I'm prepared to talk hours. I have some paper in front of me in case I needed to check my notes, but let's talk about it because it is one of my favorite topics.

Wailin Wong (1:45)

I think you're just born to be on a podcast.

Sally Herships (1:47)

Right.

Wailin Wong (1:48)

Jennifer says, back in the 1930s, when ideas like gross domestic product were being developed, the federal government realized we needed a standard way to refer to different kinds of businesses. The Department of Commerce came up with one, Standard Industry Classification Codes. By the 1990s, though, Jennifer says, they weren't keeping up with all the emerging industries. And in 1997, we adopted a new version called Naics Codes.

Sally Herships (2:13)

The codes are supposed to help us collect and monitor data accurately.

Jennifer C. Boettcher (2:18)

It's like, if you want to say, what is the market size for a grocery store? How do you define a grocery store?

Wailin Wong (2:26)

Sounds simple enough, but Jennifer gives us an example. Walmart. It sells groceries, but it's not classified as a grocery store.

Jennifer C. Boettcher (2:34)

There's a separate Naics Code for a super center that sells things. It's different from a department store, right? So there's all those three different things. A grocery store, a department store, a super store, are all classified as different entities by the federal government.

Sally Herships (2:52)

Naics Codes let industry analysts make apple-to-apple comparisons when they're looking at industry growth. There's an economic census done every five years that looks at every single business in the United States that uses Naics. There's a long list of federal agencies that rely on them. Can you make a list? I know you mentioned some of them, but can you make a list of some of the federal agencies that use Naics Codes?

Jennifer C. Boettcher (3:16)

Well, the Census Bureau, the Bureau of Labor Statistics, the Medicare people, because they want to say, what is a hospital versus an urgent care, right? The Bureau of Economic Analysis looks at the GDP.

Department of Transportation needs to know how many warehouses, how many trucks, things like that.

Wailin Wong (3:37)

But there are sometimes problems with the codes. Like until 2022, there were no Naics Codes for marijuana, even though it was a legal business and almost two dozen states. Indoor marijuana cultivators there had to use 11419 or other food crops.

Sally Herships (3:53)

So if you were like a cannabis industry analyst, how was it for you before cannabis was included at all?

Jennifer C. Boettcher (4:02)

Occasionally had those questions as a research librarian and you would say, okay, who are the aficionados? How many people subscribe to High Times?

There was associations, you know, so you contact that association and find out how many members. It was a lot of legwork. It was not as accurate.

Sally Herships (4:23)

And that can be a problem. If you're an investor, how would you know if it was the right time to buy?

Another issue for industries with no NAICS codes is federal contracts. In fiscal year 2025, almost $800 billion was awarded in contracts. But when a government worker is searching for a vendor to assign one of those plum contracts to, they filter by NAICS codes. According to the federal government, NAICS is a discovery tool. If your industry doesn't have its own code, it can make it much harder for your business to be found. And if you don't have a code, you just get this one window every five years to try to make the case that you need one.