Economic Classification Policy Committee

Report No. 1

Economic Concepts Incorporated in the Standard Industrial

Classification Industries of the United States

August 1994

Copies of this and other Economic Classification Policy Committee

reports can be obtained from the Economic Classification Policy

Committee, Bureau of Economic Analysis (BE-42), U.S. Department

of Commerce, Washington, D.C. 20230, or by telephone at (202)

606-9615, FAX (202) 606-5311.

Economic Classification Policy Committee

Report No. 1

Economic Concepts Incorporated in the Standard Industrial

Classification Industries of the United States

Introduction

In 1992, the U.S. Office of Management and Budget (OMB)

established the Economic Classification Policy Committee (ECPC),

and charged it with conducting a \"fresh slate\" examination of

economic classifications. The ECPC was explicitly instructed by

OMB to design an improved conceptual framework for a new

industrial classification system to be put into place by 1997.

In the initial part of its investigation, the ECPC published

ECPC Issues Paper No. 1, \"Conceptual Issues.\"1 ECPC Issues

Paper No. 1 develops the concept of the production-oriented, or

supply-based, industry classification. It also links the

production-oriented economic concept to the preparation of data

that would be appropriate for analyses of production,

productivity, input intensities, and so forth. All of these uses

share the requirement that the data be constructed according to

the production-oriented concept.

The second economic concept, the market-oriented or

demand-based economic classification system, is also developed in

ECPC Issues Paper No. 1. The paper shows that the

market-oriented concept results in data that are appropriate for

marketing studies, demand studies, market share studies, and

related analyses.2

Emphasis on economic concepts is a relatively new approach

to developing economic classifications. The ECPC\'s focus on

economic concepts is responsive to views expressed by many of the
participants at the 1991 International Conference on Classification on
Economic Activities.3

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1 Economic Classification Policy Committee, Issues Paper No.1,
\"Conceptual Issues,\" Federal Register, March 31, 1993, pp.
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

16991-17000.

2 ECPC Issues Paper No. 1 asked for public comment on the
appropriateness of these two alternative frameworks for a new

classification system for the United States. A report, \"Summary

of Public Comments to ECPC Issues Papers Nos. 1 and 2,\" is

available upon request from the ECPC.

3 Bureau of the Census, Proceedings, International

\_\_\_\_\_\_\_\_\_\_\_

Conference on Classification of Economic Activities, Williamsburg,
Virginia: U.S. Department of Commerce, November

More fundamentally, the ECPC\'s emphasis on economic concepts for
economic classifications is, equivalently, an emphasis on the uses of
industrial data, particularly the uses of such data in

economic analysis. When data uses are emphasized to develop

economic classifications, the first step is an explicit analysis

of the major uses of data that are based on economic classifications;
the second step is to derive, and from the

economic framework and economic concepts that underlie the uses

of data, implications for the design of economic classification

systems. Tying the design of economic classifications explicitly

to the economic uses of classified data is the major innovation

introduced by the ECPC, compared with past work in

classifications.

The ECPC determined early in its review process that it was essential to
understand the underlying concepts embedded in the

existing U.S. Standard Industrial Classification (SIC) system,

before recommendations could be made on developing a new system.

The present U.S. SIC system originated over 50 years ago and has

been revised many times, most recently in 1987. Little

documentation now exists on how the SIC system was developed and

on its revisions since its inception. For example, no written

documentation was produced on the 1987 SIC revision, though some

internal files exist for earlier SIC revisions. The bases for

decisions that led to the current U.S. system have been lost in

time.

Many different views about the structure of the present U.S.

SIC system have been expressed. Not surprisingly, many of the criticisms
that have been made of the U.S. SIC system reflect these different views
about the structure of the system, and of the purposes for which it was
designed. Moreover, some critics have in mind uses for industrial data
that differ from, and are not always fully consistent or compatible
with, the uses desired by others who have criticized the system.

In one view, the U.S. SIC system embodies primarily production-oriented
concepts, and (depending on their views about the ideal classification
system) persons who hold this view contend that the production-oriented
decisions should either be changed, or that production-oriented
decisions should be implemented more consistently throughout the system.
Others with a different view of the system feel that it is primarily a
market-oriented system, which is either favored or not, depending on the
view of the speaker.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

6-8, 1991, 587 pages. Available from Bureau of the Census, Room 2069-3,
Washington, D.C. 20233.

Some have also said that the present SIC system reflects different
decisions, depending on stage of process\--that is, primary goods
industries, for example, have been treated differently in past SIC
decisions from finished goods industries. Still others have said that
differing concepts have been incorporated into different parts of the
SIC system. Differing concepts may have been adopted because of inherent
differences in the structure of production and of markets across
different sectors of the U.S. economy, or because trade associations,
and to an extent corporate structures, vary as to organizing principle,
and these organizations have influenced past decisions about the SIC
system.

Because so many differing views have been expressed about the present
U.S. SIC system, the ECPC initiated a study to ascertain the conceptual
basis of industries in the system. A similar study of the Canadian SIC
system has been conducted by Statistics Canada. This paper explains how
those reviews were conducted and presents the results for the United
States. A companion paper4 presents results for Canada.

I. The Idea of a Concept-based Industry

As described in ECPC Issues Paper No. 1, a production-oriented or
supply-based industry is one in which the production technology of the
industry\--described by the production process itself, the materials
sed, the type of labor employed, or some combination of these\--uniquely
defines the industry. That is, when an industry is defined on a
production-oriented concept, the producing units that are grouped within
the industry\'s boundaries share a basic production process, they use
closely similar technology. Producing units in no other industry share
the same technology and production process. In the language of
economics, producing units within an industry share the same production
functions; producing units in different industries have different
production functions. The boundaries between industries thus demarcate,
in principle, differences in production processes and production
technologies.

In contrast, a market-oriented or demand-based classification is one in
which either the products form a unique market, or the products are used
and/or distributed together. If the grouping is a \"market\" category,
then the products included in it are closer substitutes among themselves
than are any products outside the industry. If products are used
together

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4 Young, Kenneth, \"The Conceptual Basis of the Standard

Industrial Classification,\" Standards Division, Statistics

Canada, February 1994.

(complements), or share distributive networks, this is another

basis for a demand-based classification.5

Obviously, both conceptual definitions leave a great deal of room for
interpretation. For example, a market-oriented industry might be defined
in terms of the cross price elasticities of demand between the products
within the industry versus products outside the industry (or
alternatively, on what are known as \"elasticities of substitution\").
However, comprehensive empirical information on substitution among
commodities\--from marketing studies or from demand studies, for
example\--was not available for the ECPC study. In the absence of data
on substitution, markets may be considered more broadly or more
narrowly. Where, for example, does one draw the boundaries among markets
for different kinds of beverages? If different kinds of soft drinks are
close substitutes, are not soft drinks also substitutes for juices? for
milk? for beer? The working group carrying out the ECPC study had to
impose its judgment about what seemed reasonable market categories.

Similarly, production processes may be considered broadly or

narrowly. For some purposes, welding and brazing are the same process;
for others, they are not. Manufacture of parts may involve quite
different technology from assembly of the parts into the ultimate
product, and the two kinds of processes may or may not occur together in
the same establishment. In many cases, the production process that leads
to a particular product may in fact be a set of interrelated but
distinct processes that are performed together in the same
establishment. Moreover, vertical integration of these interrelated
processes may be present in some establishments and not in others, which
must also be considered in the judgments incorporated into the matrix.
Again, provisional judgments on production processes had to be made in
order to carry out the study.

The ECPC wishes to emphasize the role of judgment in the

review that is contained in this report. The working group\'s

results were inevitably constrained by the information available

to it, so its findings should be viewed as preliminary, and as a

basis for further discussion. Comment on the judgments in the

matrix, from industry representatives or other knowledgeable

persons, is solicited and welcomed.

ECPC Report No. 1 presents to the public more information about the
production-oriented and market-oriented concepts

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5 ECPC Issues Paper No. 1 also discusses Hicksian

aggregation and functional aggregation as alternative bases for
market-oriented classifications. For lack of information, no attempt was
made to judge whether industries corresponded these standards for
forming demand-based industries.

described in ECPC Issues Paper No. 1, particularly on how these economic
concepts can be used in pragmatic ways to guide the

process of determining industry classifications. The ECPC has requested
(see Federal Register, July 26, 1994) that proposals

for new or modified industries be based on implementing the
production-oriented economic concept. The information in the matrix, and
the review process that is described in this ECPC report, can
accordingly provide information and guidance to those individuals or
organizations who are interested in proposing new 4-digit industries or
modifying existing ones.

II\. The Matrix

A working group reviewed individual U.S. 4-digit industries

to determine if a conceptual basis for each industry could be
identified. A subset of the 1,004 U.S. 4-digit industries was chosen for
study. The 4-digit industries examined included all those in the
following SIC major groups.

Goods-producing major groups (\"2-digit industries\") were

selected to include capital, consumer and intermediate goods, and both
durables and nondurables:

Major Group 20 Food and Kindred Products

Major Group 23 Apparel and Other Finished Products Made from Fabrics and
Similar Materials

Major Group 33 Primary Metal Industries

Major Group 35 Industrial and Commercial Machinery and Computer
Equipment

Major Group 37 Transportation Equipment

The 175 4-digit industries in the above 2-digit major groups

accounted for 37 percent of the 459 industries in manufacturing,

and 43 percent of U.S. manufacturing value of shipments in the

1987 Economic Censuses (table 1).

The working group also studied the 60 4-digit industries in

the following Major Groups in the services sectors:

Major Group 72 Personal Services

Major Group 73 Business Services

Major Group 87 Engineering, Accounting, Research,

Management, and Related Services

The services industries selected for review accounted for 43

percent of services industry receipts, the same proportion as the

manufacturing industries included the study. The services industries
also included many that provided rigorous \"test cases\" for application
of the economic concepts.

In total, the working group reviewed 235 industries, 23 percent of the
1,004 U.S. SIC 4-digit industries. These industries accounted for 19
percent of U.S. total value of shipments or receipts in 1987.

At the beginning of its work, the matrix working group

designed a questionnaire that helped focus the discussion for each
industry. A copy of that questionnaire is reproduced as Appendix A.

Each 4-digit industry was discussed at length among the members of the
working group until a consensus was reached on the presence or absence
of an economic concept that described the industry. The discussion was
directed, either explicitly or implicitly, by the questionnaire,
Appendix A. Answers to the questions on the questionnaire dictate the
corresponding entries in Appendix B, according to the rules set forth in
the instructions on the questionnaire.

The results of the review are documented in the \"Matrix of

Economic Concepts in Selected U.S. SIC Industries\" (Appendix B).

The matrix shows the extent that each U.S. 4-digit SIC industry
corresponds to production-oriented or market-oriented classification
concepts, as those concepts are explained in ECPC Issues Paper No. 1.

It is important to emphasize again the judgment involved in this
process. Judgments are incorporated into the matrix, and those judgments
are inherently subjective. None of the working group members qualified
as an authority on the technology and production processes used in the
4-digit industries that were studied, nor were they necessarily
marketing experts. Other analysts may disagree with the judgments the
working group made, or have access to better information than was
available to them.

Individuals from within the industries themselves, individuals who have
carried out marketing studies on products produced within these
industries, and other private sector and government industry authorities
would no doubt be able to add valuable information on production
technologies and on markets for all of the industries that were studied
by the working group.

The ECPC welcomes comments from informed persons on thejudgments
incorporated into the matrix. Those judgments should be considered as
the basis for further discussion, for refinement, and for revision when
more expertise on particular markets and production processes becomes
available, either from industry comments or from elsewhere. The matrix
in its present stage can thus be thought of as a preliminary review of
the U.S.

classification system, and it is subject to revision as additional
information is received from industry and other sources.

Forming the Matrix from the Questionnaire

Reviewing the questionnaire (Appendix A) is useful, not only for
understanding how the matrix (Appendix B) was constructed, but also to
explain the symbols that are used in the body of the matrix. Each
question in the questionnaire has a counterpart column in the matrix;
both the questions in the questionnaire, and columns in the matrix, are
organized into production-oriented (supply-based) and market-oriented
(demand-based) blocks.

Consider first the production-oriented questions (part A of the
questionnaire). The first question under part A asks whether there is a
common production process that is shared by the establishments in this
industry, and if it is a production process that distinguishes those
establishments from producers in other industries. An affirmative answer
means that the production process defines the industry, and the letter
\"D\" (defines a conceptually based industry) was entered in the matrix
under the column labeled \"process.\" Thus, taking as an example SIC
2021, Creamery Butter, the process of churning to make butter appears
unique to this industry, the more so if one considers the fundamental
input (cream) that also characterizes this industry.

As implied by the butter example, question A.2 asks a similar question
about the material or materials used in the industry. A material was
considered to define an industry only if the characteristics of the
material imply a fundamental partof the technology. For example, the
physical properties of cream dictate the technology used to separate
butter. As another example, the physical properties of fluid milk
dictate many of the processing methods and the types of machinery and
equipment that must be used to handle it.

The working group considered material as a way of isolating

aspects of the technology and the production process that were

associated with a particular material, aspects that might not

otherwise have been considered fully or might not otherwise have

been understood adequately by the working group members. An

industry\'s mere use of a characteristic, unique or major material

is not sufficient to define a production-oriented industry. For

example, baking chocolate cakes implies the use of chocolate,

which is not an ingredient in baking white cakes; but nothing in

the technology of cake baking differs fundamentally with the

presence or absence of chocolate, so the use of this material

does not define the technology of an industry. As another

example, open-pit mining of different ores using the same mining

technology would not necessarily be placed in different
production-oriented industries; one would have to consider the entirely
of the mining process, not just the ore.

Though it was central in many services industries, the labor

question, A(3), did not define the technology of manufacturing

industries. An exception is SIC 3544, Special Dies and Tools,

Die Sets, Jigs and Fixtures, and Industrial Molds, where highly

skilled tool and die makers were considered an important element

in defining the industry.

A positive answer to questions A.1 or A.2 led to the judgment that the
industry is defined on a production-oriented concept. In such cases, the
associated symbol \"D\" was entered in the appropriate column of the
production-oriented side of the matrix.

A similar process was used for the market-oriented portion

of the questionnaire. Using once again the example of SIC 2021,

Creamery Butter, the working group determined that the primary products
produced in this industry (butter, of different types and in different
packages) are better substitutes for each other than is any product of
any other industry. Thus, butter itself is a reasonable market category
(Appendix A, question B(1)). This answer leads to the symbol \"D\"
(again meaning that it defines a conceptually based classification, this
time on the market-oriented side) under the column \"market\" in the
matrix (Appendix B, fourth column). The working group also noted that a
broader market category might include margarine and other fats and oils,
which underscores the judgment that must be made in constructing the
matrix.

In the case of SIC 2021, Creamery Butter, the symbol \"D\" appears on
both the production-oriented, supply-based side of the matrix and the
market-oriented, demand-based side of the matrix. This means that data
for the butter industry are appropriate for use in production-related
analyses and also in demand and marketing analyses. Accordingly,
creamery butter is designated an \"ideal\" industry, and is so coded
under the \"ideal industry\" column of the matrix.

The working group considered the possibility that the establishments in
an industry might share a common production process among them, yet the
same or a closely-similar production process might be used in other
industries as well (Appendix A, question A(1)(a)). In such cases, the
industry would include only part of a production process, and the symbol
\"P\" (for partial process) was entered in the appropriate column in the
production-oriented side of the matrix. For example, a similar
processing and freezing technology is used by the establishments in SIC
2037, Frozen Fruits, Fruit Juices, and Vegetables, but it is by no means
a unique process for this industry; in Canada, frozen fish are produced
in the frozen fruit and vegetable freezing establishments using the same
process. In the matrix, the symbol \"P\" (for \"part\") appears under
process for industry 2037, because the industry as now defined appears
to include only part of an industry defined on a production-oriented
concept.

Where the symbol \"P\" appears on the production-oriented side

of the matrix, this implies that a better production-oriented industry
could be constructed by combining this industry with some other industry
or industries, or parts of them. The candidate industries for
combination are listed in the \"Comments.\"

The opposite case is where one present SIC 4-digit industry encompasses
more than one production process (Appendix A, question A(1)(b)). For
these cases, the matrix symbol \"M\" (for multiple process) is used. For
example, SIC 2034, Dried and Dehydrated Fruits, Vegetables, and Soup
Mixes, consists of two production processes: One set of establishments
uses dehydration technology; another set of establishments mixes
dehydrated ingredients into soup mixes. The working group commented that
separating soup mixes from the dehydrated fruit and vegetables portion
of the industry would create a better production-oriented industry (in
this case, they also judged that it would improve the grouping as a
marketing category).

On the market-oriented side, similar definitions of \"P\" and \"M\"
symbols were used. For example, all of the products produced in an
industry might belong to the same market, but products from some other
industry might also belong in this market (Appendix A, question
B(1)(a)). These cases are treated in parallel with the partial process
industries: The symbol \"P\" (for part market) is entered in the
appropriate column or columns of the market-oriented side of the matrix.
If multiple markets exist within an industry (Appendix A, question
B(1)(b)), an \"M\" is entered in the appropriate column of the matrix,
Appendix B.

The final column in the matrix records cases where the working group
gave a negative answer to every question on the questionnaire. For
example, SIC 2023, Dry, Condensed, and Evaporated Dairy Products,
combines neither common production processes nor does it correspond to a
marketing category, so far as the working group\'s judgment could
discern. For this reason, the symbol \"N,\" for \"No conceptual basis,\"
was entered in the far right-hand column of the matrix. Most of the SIC
system\'s \"99\" or \"not elsewhere classified\" (nec) industries lack
any economic concept by definition, and were recorded \"N\" in the
matrix. All these industries are candidates for restructuring.

Industry Examples from the Matrix

It is instructive to go through a few additional examples to

understand the reasoning that went into the matrix.

Consider first industry 2096, Potato Chips, Corn Chips, and

Similar Snacks. Following the questionnaire, there does seem to be a
common process in the industry\--frying, or oil cooking. Frying would
define the technology used in this industry, except that it occurs in
other food industries also. Thus, the working group entered \"P\" in the
process column.

On the demand side, using judgment the working group decided

that SIC 2096 is a reasonable market category. If it were building a
market-oriented system from scratch, the group might also include
pretzels and nuts in the snack foods market category.

Another market-based food industry is Natural, Processed,

and Imitation Cheese (SIC 2022). One might think that

cheese-making would be a process-based industry, and so it would.

However, SIC 2022 contains imitation cheese, cheese \"analogs,\"

cheese dips, and so forth, which do not share similar production

processes, or even similar materials. SIC 2022 is thus

classified only as a market category.

An interesting interaction between production-oriented and

market-oriented categories arises in the two candy industries (2064 and
2066). Establishments in the candy industry itself (SIC 2064, Candy and
Other Confectionery Products) do not appear

to share any common production process. Instead, candy seems to

be a market grouping. It is, however, not a complete market.

Although chocolate bars made by producers that do not grind and

process the cocoa beans are in the candy industry (SIC 2064),

chocolate bars made by fully integrated chocolate makers are in

another industry, SIC 2066, Chocolate and Cocoa Products. The

chocolate industry, SIC 2066, seems to be defined primarily on

the production process of grinding and processing cocoa beans:

That is, SIC 2066 is primarily a production-oriented industry.

Many of the resulting products are not close substitutes (baking

chocolate for example), and therefore do not make up a single

market category. Because the candy industry, SIC 2064, includes

some chocolate bars, but not others, it is only a partial market

category; its related industry, the chocolate industry, SIC 2066,

has some attributes of a production-oriented industry.

Another example is SIC 3562, Ball and Roller Bearings. The
bearing-making process was judged unique, so \"D\" was entered under
process. On the market side, the products also form a unique market,
although a more complete market also would include plain bearings, which
are close substitutes in some applications. Since the industry is
uniquely defined on both the supply and demand sides, it meets the
criteria for an \"ideal\" industry, and has been denoted as such.

Note, as the bearing industry example shows, that the designation
\"ideal\" indicates only that data for the industry as

presently defined can be used both for production analyses and for
market analyses. It does not indicate that some refinement or revision
of the present industry definition would or would not make the industry
even better for one or more of the intended data uses.

Another manufacturing example is SIC 3563, Air and Gas Compressors. This
industry is titled incorrectly: It actually consists of \"air and gas
compressors, and spraying, dusting, and painting equipment.\" Correctly
titled, it neither combines establishments employing a unique process
(or labor type, or material) nor does it comprise a unique market.
Compressors are often used with spraying and painting equipment, but the
products that are included in this industry cannot be viewed as
complements either. The industry thus appears to have neither a
production nor a market basis, and was coded \"N,\" which signifies the
belief of the working group that the industry as now defined corresponds
to no conceptual basis.

Clothing industries were, in general, problems. It is difficult to see
that the production process for Men\'s and Boys\' Suits, Coats, and
Overcoats (SIC 2311) is significantly different from the production
process for Women\'s, Misses,\' and Juniors\' Suits, Skirts, and Coats
(SIC 2337), or from that for Men\'s and Boys\' Separate Trousers and
Slacks (SIC 2325). Moreover, these industries all include several levels
of integration: Integrated manufacturers that purchase materials and
\"cut and sew\" the garment; contractors that do not own the material,
but only manufacture the garment for another entity; and jobbers that
own the material and perhaps style the garment, but contract out for the
garment\'s manufacture. The actual processes involved in nearly all the
4-digit industries in Major Group 23 are the same in each industry,
namely: design the garment, purchase the material, cut the material, and
sew the garment. It also is difficult to see why a clothing
establishment that makes men\'s coats (or a cut-and-sew shop that cuts
and sews men\'s coats) could not, in principle, do the same operation on
women\'s coats.

For this reason, the working group entered \"P\" under process for

all the 4-digit clothing industries, indicating that there seems

little basis from the production-oriented concept for the dividing lines
that are drawn in the present SIC 4-digit clothing industries.

Clothing industry establishments do, however, seem to specialize in
either men\'s, women\'s or children\'s clothing, or at least that was
true in the past. The clothing industries appear to represent marketing
categories, or categories that are defined by the distribution practices
in the industry. Establishments apparently specialize to produce apparel
products according to marketing conventions. The working group coded
almost all of the clothing industries as partial market categories.

The working group did not feel very confident in any of its

judgments with respect to apparel industries. Notice that there

are a fair number of N industries in the clothing and textiles

section, industries that seem to lack a conceptual foundation, at

least to the extent of the working group\'s knowledge of them.

Particular examples are the \"Schiffli Machine Embroideries\"

industry, SIC 2397, and the \"Pleating, Decorative and Novelty

Stitching, and Tucking for the Trade\" industry, SIC 2395. The

ECPC will obtain additional information from industry and trade

groups regarding the economic concepts for apparel industries,

and will as well consider information on the classification of

apparel from Canada and Mexico.

Primary metals provide many examples of production-oriented

industries. However, a large number of the primary metals

industries either incorporate multiple processes within them

coded \"M\" under process) or share processes across several

current SIC industries (coded \"P\"). For example, aluminum,

copper, and other nonferrous foundries, SIC 3365, 3366, and 3369,

respectively, do not seem to be separated by production process,

but by input material only. Unless the input metals have

implications for the foundry processes that must be employed on

them, these three seem partial process industries, and might be

combined into a wider production-oriented industry.

Services Industry Examples

Information on services industries is less abundant, and the

services classifications themselves are less well developed than

is true in manufacturing. For this reason, even more judgment

was required to determine the conceptual basis for services

industries.

In services, it was anticipated (see ECPC Issues Paper No.6, \"Services
Classifications\") that specialized labor inputs would be a major factor
in assessing industries on the production side. Many services industries
sell the capabilities of their employees, and though employee
contributions to the quality of the product are also vital to goods
production, employee skills are essential aspects of what services
producers do. Thus, in services industries, the questionnaire\'s labor
question (Appendix A, question A(3)) was particularly important.

One example is SIC 7323, Credit Reporting Services. The production
process in this industry involves information collection and processing;
one could argue that many other services industries also conduct
information processing activities. The working group decided that the
personnel performing similar tasks at banks and financial institutions
and at mortgage firms likely use similar skills, and that the on-line
information retrieval process in SIC 7323 was shared with SIC 7375,
Information Retrieval Services. This, the working group

decided, warranted a \"P\" under process. On the demand side, the
working group decided that the credit reporting service industry is a
unique market, and a \"D\" was entered in the market column for SIC
7323. It is probably true that financial institutions provide similar
services, but they do so mainly for themselves.

A number of \"ideal\" industries were identified among the services
industries examined. For example, SIC 8712, Architectural Services,
requires unique skills. Many years of schooling and training are
required before one is licensed as an architect, and these skills define
what an architectural firm sells. This influenced the group to code this
industry \"D\" under the labor column on the production-oriented side.
On the demand side, the whole range of services offered by an
architectural firm is unique and not readily substitutable from other
industries (though substitution may occur for some of the individual
services). Thus, a \"D\" was placed in the market column of the matrix.
With D\'s on both sides of the matrix, SIC 8712 qualifies as an ideal
industry. Note that coding SIC 8712 as ideal does not preclude
subdividing this industry, on the basis of additional information on
architectural services and their markets, into components that might
also be ideal.

III\. Results of the Review

Information from the 1987 Census of Manufactures permits tabulating the
relative importance of industries that have been placed in the different
categories of the matrix.

Table 1 presents the proportion of U.S. industries that were

selected for analysis in the matrix, and the proportion of total U.S.
value of shipments accounted for by these industries. Considering just
the manufacturing and services industries divisions from which matrix
industries were drawn, matrix manufacturing industries accounted for
\$1.06 trillion of shipments, 43 percent of manufacturing shipments of
\$2.48 trillion. Matrix services industries had 1987 receipts of \$329
billion, 43 percent of the \$772 billion of receipts for the service
industries. Overall, the 235 industries reviewed in the matrix accounted
for 19.3 percent of total 1987 industry value of shipments or receipts.

Manufacturing Industries

Table 2 presents the results for manufacturing industries. It suggests
hat the current U.S. SIC has no single dominating economic concept. In
the following, all percentages relate to the totals for the
manufacturing major groups included in the study. They might change
somewhat if all the 459 manufacturing industries were included.

Only 16.6 percent of the industries (accounting for 18.8

percent of value of shipments for the manufacturing industries

included in the study) are fully defined on a production-oriented

concept. Roughly half of these are ideal industries, that is,

cases where the same industry definition would emerge from

application of either the production-oriented or the

market-oriented economic concept.

A fifth (20 percent) of manufacturing industries are partial

production-oriented industries (P). As noted, these are cases

where combination with some other industry, or parts of another

industry, might create a better production-oriented industry.

Another fifth (21.1 percent) of manufacturing industries

encompass multiple production processes (M) within the same SIC

industry definition. Multiple-process industries, however,

account for a third of manufacturing shipments, so they are among

the relatively larger industries in economic importance.

Multiple-process industries could be made into fully-defined

production-oriented industries with relatively simple divisions of the
presently-defined industries.

Over all, roughly three-fifths (58.3 percent) of manufacturing
industries incorporate the production-oriented concept in some way
(whether \"D,\" \"M,\" or \"P\"). Two-fifths (41.7 percent) of
manufacturing 4-digit industries, accounting for more than a third of
manufacturing shipments, have no production-oriented basis in the
current SIC classification system. A number of these are \"nec\"
industries, which are appropriate subjects for review and redefinition.

The situation is not much different with respect to the

market-oriented concept. A somewhat larger number of present

4-digit manufacturing SIC\'s are fully defined according to the

market-oriented concept (27.4 percent). Another quarter of

manufacturing industries (26.9 percent) are partial markets,

accounting for about the same share of manufacturing shipments as

the fully-defined market industries (20.2 and 23.2 percent of

shipments, respectively). A bit more than two-thirds of

manufacturing industries (69.1 percent) incorporate the

market-oriented concept in their definitions in some way (\"D,\"

\"M,\" or \"P\").

By shipments shares, 10 percent of manufacturing shipments arise from
ideal industries in the groups of the present SIC system that were
examined for the study. This is more than equalled by the 17.1 percent
of shipments that come from industries with no conceptual basis.

The percentages discussed in this section and displayed in Table 2
pertain only to the manufacturing major groups chosen for the review.
Manufacturing groups that have not yet been reviewed

account for more than half of manufacturing, so the picture might change
when a full review of all 459 manufacturing industries is carried out.

Manufacturing 2-digit Major Groups

Tables 3 and 4 expand on the information in Table 2 by

presenting similar tabulations for those 2-digit major groups in

manufacturing that were selected for review. Table 3 tabulates

the percentages of 4-digit industries within each 2-digit major

group, and corresponds to the percentages presented for

manufacturing as a whole in the left-hand portion of Table 2;

Table 4 tabulates the same information, weighted by value of

shipments, and so corresponds to the percentages tabulated for

manufacturing as a whole in the right-hand portion of Table 2.

In these tables, the food industries (SIC 20) and the primary metal
industries (SIC 33) have the largest percentages of fully-defined
production-oriented 4-digit industries. If one adds in the large
proportion (76 percent, by value of shipments)of multiple-process
primary metal industries in SIC 33, this SIC major group appears already
largely to conform to the production-oriented classification concept.

A large proportion of apparel industries (SIC 23) were coded

partial process, for reasons noted in section II, above. Machinery
industries (SIC 35) seem to have been defined most often by
market-oriented concepts, where they fit an economic concept at all. Few
machinery industries have been defined to be consistent with the
production-oriented economic concept (over 70 percent of these
industries were judged to have no production-oriented basis).

Transportation equipment (SIC 37) 4-digit industries include

a large proportion that have multiple processes (56 percent by

value of shipments) and multiple markets (68 percent, by value of

shipments, counting those cases where an industry has

simultaneously partial market and multiple markets in the same

SIC). Multiple process industries are possible candidates for

division to make smaller industries that more closely conform to

the production-oriented concept.

Stage of Process

Some have expressed the view that the concepts implemented

in the U.S. SIC differ by Stage of Process (SOP). On this view,

industries that are in lower SOP\'s (crude and primary materials

producing) are more likely to be production oriented. Final

products industries may be market oriented.

Tables 5 and 6 contain computations that are similar to

those presented in earlier tables, but they are arranged

according to the Bureau of Labor Statistics SOP for each 4-digit
industry (where available). The SOP classification groups industries
into Crude, Primary, Semifinished, and Finished categories, based on the
input-output tables published by the Bureau of Economic Analysis.
Producers that ship 75 percent or more of their output to final demand
are designated as Finished processors. Producers that ship 60 percent or
more of their output to finished producers and final demand, but less
than 75 percent to final demand, make up the Semifinished processors
category. Producers shipping 60 percent or more of their output to
semifinished or finished producers, but less than 75 percent to final
demand are Primary processors. Crude producers are the industries left
over after the other stages were defined.6

As the tables show, the evidence suggests a weak relation.

The proportion of fully-defined production-oriented industries is indeed
highest at the crude stage (30 percent) and lowest at the final goods
stage (12 percent), and multiple-process industries show a similar
pattern. But the differences in percentages among the various stages of
process are not large, and nearly as many crude processing industries as
final demand industries have no production-oriented basis.

Similar statements can be made on the market-oriented side. Somewhat
more final goods industries (36 percent) than crude processing
industries (20 percent) are fully-defined by the market-oriented
concept. The differences in percentages, however, are not large, and
they do not increase progressively from lower to higher SOP.

Tables 5 and 6 show that the expected SOP patterns do not

hold, even if the definition of production or market orientation is
extended to include partial industries or partial markets. Of course,
the sample of industries included in the matrix is incomplete. Further
review of other SIC major groups will provide additional evidence on the
relation, if any, between SOP and the economic concepts of SIC 4-digit
industries.

Services Industries

Table 7 presents results for the services industries. As

with manufacturing, the analysis of services industries suggests

that the current U.S. SIC has no single dominating economic

concept.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

6 Gaddie, R., Zoller, M., \"New Stage of Process Price System Developed
for the Producer Price Index,\" Monthly Labor Review,

April 1988, pp. 3-16.

Services have a higher percentage of fully-defined industries, 21.7
percent for production-oriented and 30.0 percent for market-oriented
industries, than manufacturing has. For services industries, 26.7
percent were categorized as containing multiple production processes,
which may indicate that these processes could be the basis for
artitioning services activities into a larger number of fully-defined
production-oriented industries. Only 13.3 percent (9.0 percent by value
of receipts)were partial process. On balance, therefore, the groups\'
judgment suggests a greater need for splitting existing services
industries than for combining them.

Roughly the same proportion of services industries show some

market-oriented basis (75.0 percent) as show some

production-oriented basis (73.3 percent). However, the high

percentage of services industries categorized as having partial

markets (31.7 percent) or no market-oriented basis (25.0

percent), implies that many services industries in the present

SIC do not correspond to well-defined market groupings.

Turning to the results by 2-digit services major groups

tables 8 and 9), we find that the largest percentage\--62

percent\--of poorly defined groupings occur in Major Group 87,

Engineering, Accounting, Research, Management, and Related Services,
representing about 39 percent of the total value of receipts for Major
Group 87. Major Group 87 is equally poorly defined with respect to the
market concept; perhaps its very title, which suggests an amalgam of
professional services, provides a clue to the source of the problem.

The largest percentage of fully defined industries, for both

concepts, is found in Major Group 73, Business Services. Here 31

percent of industries representing 20 percent of value of

receipts were judged fully defined on a production basis, and 38 percent
of industries representing 18 percent of value of receipts were judged
fully defined on a market basis. Including

those industries that are partially defined on the production concept
raises the percentage of production-defined industries to 50 percent,
representing 36 percent of the value of receipts for the major group.
Fully defined and partial market industries sum to 79 percent of the
industries in the major group, representing 59 percent of the value of
receipts.

Major Group 72, Personal Services, is the only services

major group containing no ideal industries. The reason seems to

lie in the collection of establishments contained therein: These

are laundries, photographic studios, barber shops, shoe repair

shops, funeral services, tax preparation, and other miscellaneous

services.

(TABLES 1-9 can be viewed at http://www.census.gov/epcd/naics/ecpcrpt1)

APPENDIX A

QUESTIONNAIRE

A. Production-oriented or Supply-based questions

1\) Does the production process uniquely define this industry?

IF YES, ENTER D IN COLUMN 2.

IF NO:

a\) Is the process used in other industries?

IF THE INCLUSION OF THESE OTHER INDUSTRIES, OR PARTS OF THEM, WOULD
CHANGE YOUR ANSWER TO (1), ENTER P IN COLUMN 2 AND ENTER THE OTHER
INDUSTRIES IN THE NOTES.

\(b\) Are there two distinct processes in this industry?

IF SPLITTING THIS INDUSTRY INTO 2 OR MORE PARTS WOULD CHANGE YOUR ANSWER
TO QUESTION (1), ENTER M IN COLUMN 2, AND INDICATE IN

THE NOTES WHAT THE DIVIDED INDUSTRIES MIGHT BE

CALLED.

\(2\) Do the materials used in this industry uniquely define

the industry?

IF YES, ENTER D IN COLUMN 3.

IF NO:

\(a\) Are these materials used in other industries?

IF THE INCLUSION OF THESE OTHER INDUSTRIES, OR

PARTS OF THEM, WOULD CHANGE YOUR ANSWER TO (2), ENTER P IN COLUMN 3 AND
ENTER THE OTHER INDUSTRIES IN THE NOTES.

\(b\) Are there two distinct materials in this industry?

IF SPLITTING THIS INDUSTRY INTO 2 OR MORE

PARTS WOULD CHANGE YOUR ANSWER TO QUESTION (2), ENTER M IN COLUMN 3, AND
INDICATE IN THE NOTES WHAT THE DIVIDED INDUSTRIES MIGHT BE

CALLED.

\(3\) Do the human capital components of the labor force

uniquely define this industry?

IF YES, ENTER D IN COLUMN 4.

IF NO:

\(a\) Are these skills used in other industries?

IF THE INCLUSION OF THESE OTHER INDUSTRIES, OR

PARTS OF THEM, WOULD CHANGE YOUR ANSWER TO

(3), ENTER P IN COLUMN 4 AND ENTER THE OTHER

INDUSTRIES IN THE NOTES.

b\) Are there two distinct labor types in this

industry?

IF SPLITTING THIS INDUSTRY INTO 2 OR MORE PARTS WOULD CHANGE YOUR NSWER
TO QUESTION(3), ENTER M IN COLUMN 4, AND INDICATE IN THE NOTES WHAT THE
DIVIDED INDUSTRIES MIGHT BE CALLED.

4\) Does a COMBINATION of material, labor, and/or process uniquely
define this industry?

IF YES, THIS IS A SUPPLY-BASED INDUSTRY. ENTER D IN APPROPRIATE COLUMNS
(COULD BE ANY COMBINATION OF 2, 3, AND 4).

B. Market-oriented or Demand-based questions

\(1\) Are the products of this industry closer substitutes

among themselves than anything produced outside the industry?

IF YES, ENTER D IN COLUMN 5.

IF NO:

\(a\) Would the inclusion of another industry (or

several, or part of another) change your answer?

IF YES, ENTER P IN COLUMN 5 AND ENTER THE

OTHER INDUSTRIES IN THE NOTES.

\(b\) Would splitting this industry into two change your

answer?

IF YES, ENTER M IN COLUMN 5 AND INDICATE IN

THE NOTES WHAT THE DIVIDED INDUSTRIES MIGHT

BE CALLED.

\(2\) Are the products of this industry typically distributed

or used together?

IF YES, ENTER D IN COLUMN 6.

IF NO:

\(a\) Would the inclusion of another industry, or part of

an industry, or of several industries or parts of

several industries, change your answer?

IF YES, ENTER P IN COLUMN 6 AND ENTER THE

OTHER INDUSTRIES IN THE NOTES.

\(b\) Would splitting this industry into two or more

industries change your answer?

IF YES, ENTER M IN COLUMN 6 AND INDICATE

IN THE NOTES WHAT THE DIVIDED INDUSTRIES MIGHT BE CALLED.