U.S. personal income and spending data for September released this morning foretell trouble for retailers.

Consumer consumption fell 1.3% in September, and BMO Nesbitt Burns says that it will likely stay weak though the critical holiday selling season.

“This is the main reason we look for Q4 GDP to be down substantially. Outlays were down across the board during the month of the terrorist attacks. There has been only a partial bounceback in activity, with spending remaining below the Q3 average early in Q4.”

There was also a drop in disposable income as the tax rebates stopped rolling in. BMO Nesbitt says its clear that most U.S. households saved their rebates rather than spending them.

“The markets are riveted on trends in consumer spending because the large job losses that are ongoing are sure to curtail retail sales. The question is by how much. The Fed’s easier monetary policy and the potential fiscal stimulus package, if Congress can get its act together, hopefully will be enough to counter the consumer headwind and support the economy,” says BMO Nesbitt. “It looks like a close call at this point.”