The Commerce Department said Thursday that consumer spending rose 0.2 percent last month. That's slightly slower than the 0.4 percent increase in November.
Income jumped 2.6 percent in December from November, the biggest gain since December 2004. The main driver of the increase was dividend payments, which companies accelerated to beat the January rise in income tax rates.
Wages and salaries grew 0.6 percent.
Consumer spending, which accounts for about 70 percent of economic activity, is expected to slow this year. That's because consumers are receiving less take-home pay starting this month because of an increase in Social Security taxes.
Analysts predict the January report will show slower income growth because most bonuses and dividends were paid out in December.
The increase in payroll taxes already hurt consumer confidence this month. And consumers will have less money to spend at a precarious time.
The economy unexpectedly shrank in the October-December quarter at an annual rate of 0.1 percent, the government said Wednesday. The contraction was largely driven by a steep cut in defense spending. Still, the dip was a reminder of the economy's vulnerability as automatic cuts in government spending loom.
Still, Paul Dales, senior U.S. economist at Capital Economics, predicts the economy will begin growing again in the January-March quarter. He notes that modest hiring will keep consumers spending enough to keep the economy afloat. He predicts consumer spending will grow at a lackluster 1 percent rate in the first quarter, down from a 2.2 percent rise in consumer spending in the October-December quarter.
The December increase in income and slower growth in spending pushed the saving rate to 6.5 percent of after-tax income. That's up from 4.1 percent in November and the highest savings rate since May 2009. It's likely to come down again in January, when income falls back.
For all of 2012, income rose 3.5 percent. That's the weakest increase since 2009, the final year of the Great Recession.
Still, consumers saw little increase in prices last year. A gauge of inflation preferred by the Federal Reserve was flat in December and up just 1.3 percent in 2012. That's well below the Fed's 2 percent inflation target.
Congress and the White House reached a deal on Jan. 1 to prevent income taxes from rising on all but the wealthiest Americans. But they allowed the temporary reduction in Social Security taxes to expire this year.
The rise in Social Security taxes will leave a person earning $50,000 a year with about $1,000 less in 2013. A household with two high-paid workers will have up to $4,500 less.
Some analysts have estimated that the roughly $120 billion in higher Social Security taxes could subtract up to 0.7 percentage point from growth this year.
And other policy decisions in Washington could slow growth further.
The agreement on the fiscal cliff averted income tax cuts on most consumers. But it only delayed across-the-board government spending cuts for two months. The cuts are set to take effect on March 1 if no agreement is reached to avert them.
The Fed announced Wednesday that it was keeping all its aggressive stimulus programs in place. These include $85 billion a month in bond purchases. The purchases are intended to keep long-term interest rates down to encourage spending, boost growth and reduce still-high unemployment.
The Fed also left its target for short-term rates at a record low and said it would stay there at least until unemployment, now at 7.8 percent, stays above 6.5 percent. Many economists think unemployment remained at 7.8 percent in January. The January jobs report will be released Friday.
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