US consumers increased their spending modestly in January when taxes rose, but they cut back sharply on major purchases that signal confidence in the economy.

Income plunged by the most in two decades, although the decline followed a one-time surge in bonus payments to avoid higher taxes.

The Commerce Department said that consumer spending rose 0.2% in January.

The gain was driven by an increase in spending on services, partly reflecting higher heating bills.

Spending on durable goods, such as cars and appliances, fell 0.8%. Spending on non-durable goods, such as clothing, was essentially flat.

Income fell 3.6% in January, the biggest drop since January 1993. But it followed a hefty 2.6% rise in December. The December gain reflected a rush by companies to pay dividends and bonuses before income taxes increased on top earners.

Consumer spending drives nearly 70% of economic activity in the US. Even a small rise could be a good sign for growth because it would mean consumers increased their spending despite a rise in social security pension taxes.

In January, Congress and the White House allowed a temporary 2 percentage point cut in Social Security taxes to expire. That means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.