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HoustonBusiness A Perspective on the Houston Economy FEDERAL RESERVE BANK OF DALLAS • HOUSTON BRANCH • Goodbye SIC, Hello NAICS: A Fresh Slate for Houston Jobs Data The biggest problem with NAICS’s freshslate approach is that it represents a major break with the past. Thus, it leaves a gap in many important data series. S tatistical data collection in the United States is carried out by many public agencies, including the Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA) and Census Bureau. Government entities use a variety of norms and standards to ensure consistency in data collection, including guidelines for the classification of businesses by industry. In 1937, the Central Statistical Board established an Interdepartmental Committee on Classification to provide an exhaustive list of manufacturing and nonmanufacturing industries. By 1939, this list had evolved into the Standard Industrial Classification (SIC) system for the United States. Although SIC has been revised extensively over the past 60 years, when a user of U.S. economic data has referred to mining, manufacturing, construction, financial, service or more detailed industries, SIC has MARCH 2003 provided rigorous and consistent meaning to the term. In 1992, the U.S. Office of Management and Budget established the Economic Classification Policy Committee (ECPC) — chaired by BEA and joined by BLS and the Census Bureau — to conduct a “fresh slate” examination of SIC and to design an improved conceptual framework for industrial classification. A series of concerns and issues provoked this reexamination: lack of internal consistency in SIC; its overemphasis on manufacturing, underemphasis on services and inability to cope with high-technology and other emerging industries; and a North American Free Trade Agreementimposed need for consistency in data collection among the participating countries. The resulting scheme, developed jointly by Canada, Mexico and the United States with ECPC representing the latter, is the North American Industry Classification System (NAICS). NAICS is not a simple revision or rearrangement of SIC but a radical break in both classification scheme and concept. The new NAICS is suddenly important to readers of Houston Table 1 Houston Employment Under SIC (4Q 2000) Agriculture Mining Construction Manufacturing TCPU Wholesale Trade Retail Trade FIRE Services Government 12,451 62,422 139,913 189,548 146,789 120,642 311,550 102,448 556,296 229,984 2, Trade, Transportaof providing classification comtion and Utilities is patibility throughout North further broken into America down to detailed Wholesale Trade, levels. The structure is also Retail Trade, Transgenerally compatible with the portation and WareUnited Nations International housing, and Utilities. Standard Industrial ClassificaFinancial Activities is tion of All Economic Activities. Total employment 1,872,043 divided into Finance Finally, NAICS is entirely and Insurance plus production-oriented, with the Total wages $20,911,259,055 Average quarterly wages $11,170 Real Estate, Rental and establishments grouped in each Average weekly wages $859 Leasing. Professional industry classification on the NOTE: TCPU is Transportation, Communication and Public Utilities; and Business Services basis of sharing a common techFIRE is Finance, Insurance and Real Estate. includes Professional, nology and production process. SOURCE: Bureau of Labor Statistics. Scientific and Technical Clearly, many of the SIC cateServices; Management gories were production-based Business because the primary of Companies and Enterprises; (metal stamping, foundries, texsource of timely and compreand Administrative and Support tiles). But others were better hensive data on the Houston Services. Education and Health seen as market-based (products economy is the BLS’s monthly Services is divided into the two forming a unique market and Covered Employment and Wages sectors in the title, as is Leisure often being close substitutes (ES-202) program. In early 2003, and Hospitality. At the most for each other). Children’s or the SIC data series for ES-202 detailed level, these 20 broad women’s clothing, for example, will be replaced by the NAICSNAICS sectors ultimately contain may not share a common probased data series. Although min1,170 industries. duction process but were ing, manufacturing and construcNAICS was developed to grouped on a market basis. tion data will still be reported achieve several broad purposes. Soft drinks and snack foods in Houston, they will reflect difOne was to shift the emphasis were similarly grouped. ferent concepts from those reof the classification scheme to NAICS eliminates all ported just last year under SIC. the rapidly growing service sectdemand-oriented categories, NAICS also will report major ors; about two-fifths of the moving to a consistent scheme new sectors, such as informaNAICS industries are goods-proof defining all classifications tion, accommodation and food ducing, as opposed to threebased on common production services, and health care and fifths under SIC. Another was processes and classifying all social assistance. to include a number of emergestablishments strictly by what ing and high-tech industries; we they do. The NAICS System now find wireless Table 1 shows Houston emtelecommunications, ployment for the fourth quarter software publishing, Table 2 of 2000 as defined under the Houston Employment Under NAICS (4Q 2000) Internet service 10 major SIC divisions. Total providers and web Natural Resources and Mining 59,574 wages, average quarterly wages search portals Construction 140,674 Manufacturing 187,841 per worker and average weekly among the industries Trade, Transportation and Utilities 421,780 wages are summarized at the on the NAICS list. Information 43,742 bottom. Under the most recent Additionally, Financial Activities 112,854 (1987) revision, SIC detailed Professional and Business Services 299,193 every effort was Education and Health Services 168,018 1,004 industries in these 10 made to provide Leisure and Hospitality 148,567 major divisions, although only international comOther Services 57,907 53 categories were regularly patibility through Nonclassifiable 950 reported for Houston. Public Administration 229,984 NAICS. By developTable 2 summarizes the same ing NAICS jointly, Total employment 1,871,084 data under NAICS. NAICS proU.S., Mexican and Total wages $20,902,154,597 vides 20 high-level sectors, as Canadian statistical Average quarterly wages $11,171 opposed to SIC’s 10. In addition agencies met the Average weekly wages $859 to those sectors shown in Table NAFTA requirement SOURCE: Bureau of Labor Statistics. Table 3 Establishment Classification Under SIC and NAICS Facility Purpose SIC Classification NAICS Classification NAICS Problems A Mufflers Auto Parts Manufacture Auto Parts Manufacture The biggest problem B Tailpipes Auto Parts Manufacture Auto Parts Manufacture with NAICS’s fresh-slate C Warehouse Auto Parts Manufacture Transportation and Warehousing approach is that it repD R&D Auto Parts Manufacture Professional and Technical Services E Sales Wholesale Trade Wholesale Trade resents a major break F Headquarters Auto Parts Manufacture Headquarters with the past. Thus, it G Payroll Auto Parts Manufacture Professional and Technical Services leaves a gap in many NOTE: Example is from Clarification Memorandum No. 3, “Classifying SIC Auxiliary Establishments in NAICS,” at important data series www.census.gov/epcd/www/naimemo3.htm. for those interested in trends, forecasting or seasonal adjustment. Of ter; a headquarters; and a payImplications for Houston the 1,170 NAICS industries, roll function. It is a fresh slate for Houston only 422 (36 percent) have Under SIC, all of the separate data, too. Users of employment, direct SIC counterparts, 390 (33 administrative establishments wage and other data at the state percent) are significantly associated with this company and local level are the most disrevised and the remaining 358 would be classified under Auto advantaged because of the break (31 percent) are new classificaParts Manufacture except for the in the data series NAICS imtions. Also, many of the reclassales unit, which goes to Wholeposes. Total employment and sifications cross major industry sale Trade. Under SIC, the estabemployment for some large groups, meaning that comparlishments provided support for sectors will be provided for the isons of even large categories a manufacturing activity; the clasnation back to 1939; start dates such as mining, manufacturing sification was on the basis of for finer detail vary widely. For and finance cannot be made prethe company activity, and the states and local areas, only total and post-SIC. jobs were assigned to the auto employment data will be availFurther, the NAICS approach industry. able back to 1939; nothing of classifying every establishUnder NAICS, however, more detailed than total ment based on its production each establishment is judged employment will be available process is a substantial change on its own merit, and only the for before January 1990. in procedure. Consider, for exmuffler and tailpipe factories The inconvenience of ample, the Covered Employment are in manufacturing. The payNAICS at the local level will be and Wages Program that proroll function, for example, is less than anticipated. For the vides monthly employment data treated no differently from any Houston area, monthly employfor the United States (including independent payroll processing ment reports will now provide Houston). NAICS required service; it is classified in NAICS data on more than 60 NAICS reassessment of the industry 541214, Payroll Services, part categories — up from the 53 classification of 8 million estabof Professional and Technical reported under SIC. We will lishments over a four-year Services. see new job categories, such as period, with each establishment The example shows that difheavy construction, computer classified to the industry that ferences between SIC and NAICS manufacturing, telecommunicareflects its primary productive reflect more than establishing a tions, computer systems design, activity. Thus, the industry catnew classification scheme and and nursing and residential egories for many establishments moving establishments from care facilities. BLS will provide have changed. one category to another. Under historical detail back to January Table 3 illustrates this NAICS, the initial establishment 1990 on all 60-plus industries change using an example proclassification becomes comusing bridge tables containing vided by the Census Bureau. A pletely production-based, and estimates based on ratios behypothetical manufacturing establishments are widely tween SIC and NAICS industries. company is made up of seven reclassified. Although classificadistinct establishments, each tion structure is compatible, — Robert W. Gilmer performing a certain business this production-based scheme Jonathan Story function. There are two factois unique to NAICS, making it ries, one manufacturing mufdifferent from SIC, from the Story is an analyst in the Bank flers and the other tailpipes; a United Nations’ classification Administration Department at the warehouse; a research and and from other international Federal Reserve Bank of Dallas development lab; a sales cenHouston Branch. schemes. Houston H BeigeBook February 2003 ouston Beige Book respondents provided a mixed review of the local economy, indicating little overall change in fundamentals. There was no significant job growth, but the local unemployment rate has stayed at a seasonally adjusted 5.7 percent for three months. The local purchasing managers index moved back over 50 in January, indicating mild expansion, and the single-family housing market remains very strong. Weakness continued in auto and retail sales. inventories, high gasoline prices are likely to persist through summer. The loss of Venezuelan crude supplies hit Gulf Coast refiners hard. Refinery utilization rates fell from the mid-90 percent level in mid-January to mid-80 percent by early February and have improved slowly since. Refined product prices have shot upward but have generally lagged the price of crude, putting modest downward pressure on refiners’ profit margins. Retail and Auto Sales Retail sales were reported to be very soft across all segments of the market, from discount and department stores to furniture and grocery stores. Since the holidays, retailers have been falling further and further behind plan. Auto dealers are finding that last year’s rebates and discounts stole sales from this year, with January sales in Harris County running 8 percent below last January’s. Petrochemicals High oil and natural gas prices are bad news downstream, and petrochemical producers have been forced to push through price increases to cover rapidly rising feedstock prices. Prices are up for polyethylene, polystyrene, butadiene, chlorine and polyvinyl chloride. Although demand has recovered over the past year, profit margins generally remain weak, and rising prices have been strictly an effort to maintain modest profit margins. Oil Markets Excitement in recent weeks has been provided by the fireworks in oil and natural gas prices, which moved over $35 per barrel for crude oil and $6 per thousand cubic feet for natural gas. Potential war in Iraq, class war in Venezuela and freezing weather in the Northeast and Midwest gave momentum to energy prices. There was a sharp pulldown in inventories of both crude and oil products, and stocks fell to near-critical levels for refinery system operations. With crude supplies unavailable to rebuild Drilling Activity The domestic rig count improved to over 900 working rigs in February, but the new projects were generally conservative — onshore, vertical, lowcost wells. Service companies declined to declare a discernible upward trend in activity based on recent weekly increases. Any U.S. gains were offset by weakness overseas — turmoil in Venezuela, elections in Nigeria, seasonal weakness in the North Sea. A sharp decline in natural gas inventories bodes well for future drilling, but producers’ stock prices still do not reflect the sharp rise in oil and natural gas prices. Real Estate Low interest rates continue to drive strong sales of singlefamily housing in Houston. Existing homes hit the highest level of January sales ever, matched by both the highest median January home price and builder inventory. Apartment occupancy continued to fall in class A, as strong home sales and no job growth took their toll. Apartment rents, which were rising for most of last year, flattened in the fourth quarter, especially in class A. Office rents continued to decline through the fourth quarter, just as they did all year. In pursuit of office tenants, property owners are offering free rent and free parking as well as moving and improvement allowances. The weakest markets are in the central business district, Westchase, Greenway Plaza and Galleria areas. For more information or copies of this publication, contact Bill Gilmer at (713) 652-1546 or bill.gilmer@dal.frb.org, or write Bill Gilmer, Houston Branch, Federal Reserve Bank of Dallas, P.O. Box 2578, Houston, TX 77252. This publication is also available on the Internet at www.dallasfed.org. The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.
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