The Commerce Department reported Thursday that incomes, which include wages, interest and government benefits, rose by 0.4 percent in December, twice as fast as many analysts were predicting, and up from a 0.2 percent rise the month before.

Analysts had expected weak income growth as companies cut back working hours because of a rapid slowdown in sales and bad winter weather.

Spending, meanwhile, rose for the third straight month by 0.3 percent, slightly stronger than the 0.2 percent rise many analysts were forecasting. But December's increase was much smaller than the 0.8 percent gain posted in September.

Seeking to prevent the faltering economy from slipping into a recession, the Federal Reserve on Wednesday cut interest rates by another half percentage point, following up on its first cut on Jan. 3. Economists predict more rate reductions in the coming months. Among the reasons the Fed cited for Wednesday's rate cut: further erosion in consumer and business confidence.

Consumer spending, which accounts for two-thirds of all economic activity, has been an engine of the economy's growth. But consumers have been tightening the belt, contributing to the current economic slowdown.

The government reported Wednesday that the economy slowed to a growth rate of just 1.4 percent in the fourth quarter of 2000, the weakest performance in more than five years, as spending on cars, computers and other costly goods fell.

In Thursday's report, spending on big-ticket goods fell for the third straight month in December, declining by 1.9 percent. Spending on nondurable goods, such as food and fuel, was flat after slipping 0.1 percent in November.

But spending on services rose a strong 0.9 percent in December, up from 0.8 percent in November.

Economists say a number of factors have been making people feel less inclined to make big purchases: Consumer confidence plunged in January, hitting its lowest level in more than four years. The stock market has been volatile and energy prices are higher.

For all of 2000, Americans' incomes rose by 6.3 percent, up from a 5.4 percent rise in 1999. Spending rose 7.8 percent, up from 7.1 percent in 1999 and the biggest increase since an 8.1 percent rise in 1988. The strong showing for both income and spending in 2000 reflected the sizzling economy during the first half of the year.

In December, the income and spending report showed, wages grew by 0.2 percent, down from a 0.3 percent rise in November.

Disposable personal income, the amount left after paying taxes, rose by 0.4 percent in December after a slim 0.1 percent rise the month before.

The personal savings rate — savings as a percentage of after-tax income — stood at a negative 0.8 percent, in December, up from a negative 0.9 percent, an all-time monthly low.

Still, economists say the savings rates isn't as dire as it would seem because it doesn't capture gains realized from such things as higher real estate values or from financial investments.