Understanding Your Industry

Estimating a base year
To calculate change over time, data are required for a base year and recent year. The base year may be two, five, ten, or any number of years earlier than the most recent year used in the analysis. If your economy went through a short period of decline at some point in the recent past (e.g., four years ago), it is probably best to select a year prior to that downturn. This should provide a more accurate picture of how industries in the region are doing. For example, if you compare recent data with what happened during an off-year, you may think the industries have experienced remarkable growth when actually they were only making up lost ground. In other words, it is important to choose a base year that is at the same point in a business cycle as your current year.

North American Industrial Classification System (NAICS)
A common method of classifying businesses or industries by type is the North American Industrial Classification System, commonly referred to as the NAICS Code. It divides virtually all economic activity into divisions that are further broken up into numbered major groups. NAICS codes get progressively more specific as the number of digits increases. A two-digit NAICS code indicates the broad industry category (e.g., furniture). Adding a third digit might further specify a type of furniture (e.g., home furniture or office furniture). The fourth digit narrows the industry category still further (wood household furniture or metal household furniture). Often, on-line sources only provide two-digit NAICS data. However, in searching for data sources with NAICS codes, three and four digit NAICS data are much more useful than two digit NAICS data.

A full listing of NAICS codes will be an important tool in your industry analysis.

Business cycles
Business cycles are observed fluctuations in the economy: economic expansion followed by economic decline (a recession or, in severe cases, a depression) and then recovery. Business cycles are identified through changes in several economic measures, such as output, employment, stock prices, wages, spending, and money supply. In examining your industries over time, it is important to be aware of business cycles and how they may impact your analysis. It is most useful to select two years that are at the same point in a business cycle. For example, you may want to look at two years in which the economy was expanding.