U.S. consumers increased spending modestly in January despite rising taxes, but they sharply reduced major purchases that signal confidence in the economy. Personal income plunged by the most in two decades, although the drop followed a one-time spike in bonus payments to avoid higher taxes, the government said Friday. The Commerce Department said consumer spending rose 0.2 percent in January, driven by an increase in spending on services, including higher heating costs. Spending on durable goods, like cars and appliances, fell 0.8 percent. Spending on non-durable goods, like clothing and fuel, was flat. The drop in spending on goods reflects the effect of the expiration at the end of 2012 of a 2 percent payroll tax cut. The impact is expected to be bigger in February's spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which also are being strained by rising gasoline prices. Economists expect consumer spending in the first three months of this year to slow sharply from the fourth quarter's 2.1 percent annual pace. Consumer spending is closely watched because it accounts for about 70 percent of U.S. economic activity. Income plunged 3.6 percent in January, the largest drop since early 1993. Much of the decline was related to a 2.6 percent surge in December as businesses, anxious about higher taxes, accelerated the payment of stock dividends and annual bonuses before the start of 2013. Some of the January income decline also reflected the higher payroll taxes. Household income after taxes and inflation plunged 4 percent in January after gaining 2.7 percent the previous month. With income falling sharply and spending rising, the savings rate—the percentage of disposable income households are saving—fell to 2.4 percent, the lowest level since late 2007.
