Consumer spending rose slightly in January even as income tumbled

WASHINGTON -- Consumers spent slightly more in January than the previous month even as their income plummeted by the largest amount in 20 years because of the “fiscal cliff,” the Commerce Department said Friday.

People boosted their spending by saving less money as they sought to offset tax increases that took effect. The personal saving rate in January was 2.4% -- down from 6.4% in December -- marking the lowest monthly level since late 2007.

Personal consumption expenditures rose 0.2% in January following a 0.1% rise in December. The increase was in line with analyst expectations.

Spending on services increased while spending on goods fell, a possible sign of the impact of the increase in payroll taxes for all workers and income taxes for high earners.

The tax increases that took effect at the start of the year were part of a deal in Washington to avert the worst effects of the so-called fiscal cliff, which would have seen income taxes rise across the board along with the automatic spending cuts that were delayed until Friday.

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Capital gains taxes also rose as part of the deal.

Fears of those tax increases -- particularly the capital gains rise that also kicked in last month -- led companies to pay bonuses and dividends in December, which caused personal income to jump 2.6% in December from the previous month.

Pulling that money forward appeared to be a factor in personal income dropping 3.6% in January, the largest one-month plunge since 1993.

Private wages and salaries dropped at an annual rate of $15 billion in January after rising at a rate of $30 billion in December, “reflecting the impact of accelerated bonuses in anticipation of changes to individual income tax rates,” the Commerce Department said.

The tax increases that took effect in January also likely had an impact on personal income, just as they did with spending.

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