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* Consumer spending rises 0.4 percent in December
* Income flat, saving rate lowest in 11 months
* Consumer confidence dips in January, Midwest factories cool
By Lucia Mutikani
WASHINGTON, Jan 31 (Reuters) - U.S. consumer spending rose in December, but an ebb in consumer confidence and signs of cooling in factory activity this month suggested economic growth could moderate in the first quarter.
The Commerce Department said on Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent after advancing 0.6 percent in November.
Last month's rise beat economists' expectations for a 0.2 percent gain.
While December's increase provided a firmer base for first-quarter spending, weak income growth could erode momentum. Income was flat after rising 0.2 percent in November.
"The inability of income growth to keep pace with the increase in consumer expenditure places the sustainability of recent expenditure-driven economic growth into question," said Gennadiy Goldberg, an economist at TD Securities in New York.
"In fact, stagnant income growth and dwindling savings could lead consumers to moderate some of their spending plans in the months ahead, weighing on growth in early 2014."
Separately, the Thomson Reuters/University of Michigan's consumer sentiment index slipped to 81.2 in January from 82.5 in December. Confidence was down among households with annual incomes below $75,000.
Consumer spending recorded its strongest gain in three years in the fourth quarter, helping to lift the economy to a 3.2 percent annual growth rate during that period.
In another report, the Institute for Supply Management-Chicago business barometer fell to 59.6 from 60.8 in December. A measure of factory employment in the U.S. Midwest contracted for the first time in nine months, while deliveries to suppliers fell.
However, production, new orders and order backlogs increased slightly after falling in the prior two months.
The reports had little impact on U.S. financial markets, which took their cue from a weak inflation report from the euro zone, an ongoing emerging markets sell-off and disappointing corporate earnings.
U.S. Treasury prices gained while equities dropped sharply.
Income is being held back by stagnant wage growth as the economy works through slack in the labor market.
But there are signs that wage growth could be on the brink of acceleration. In a fourth report, the Labor Department said wages and salaries increased 0.6 percent in the fourth quarter, the biggest jump since the third quarter of 2009.
It followed a 0.3 percent advance in the third quarter. Wages and salaries account for 70 percent of employment costs.
Last month, income at the disposal of households after adjusting for inflation fell 0.2 percent. That move could take some steam out of consumer spending in the first quarter.
Weak income growth against a fairly strong spending backdrop at the end of last year led to less saving. The saving rate - the percentage of disposable income households are socking away - fell to an 11-month low of 3.9 percent in December.
It was at 4.3 percent in November.
"The U.S. consumer has continued to rely heavily on savings," said Eugenio Aleman, a senior economist with Wells Fargo Securities in Charlotte, North Carolina.
"The U.S. can continue to rely a bit longer on bringing down the saving rate. At some time during this year we expect that consumption is going to weaken if we do not see some pickup in personal income and or a stronger recovery in consumer credit."
In light of the firming demand, inflation increased a bit in December. A price index for consumer spending rose 0.2 percent after being unchanged for two consecutive months.
Over the past 12 months, prices rose 1.1 percent, compared to an advance of 0.9 percent in November.
Excluding food and energy, the price index for consumer spending rose 0.1 percent, rising by the same margin for a sixth straight month. Core prices were up 1.2 percent from a year ago, after rising 1.1 percent in November.
Both inflation measures remain stuck below the Federal Reserve's 2 percent target. That suggests that the Fed, which is gradually reducing the amount of money it is pumping into the economy, will hold interest rates near zero for a while.