Consumer sentiment plummeted in early August, according to a widely followed survey.

Why it matters: Deteriorating sentiment signals trouble for the economy if it means consumers pull back spending.

• Before the August reading, sentiment had generally been improving for much of this year, as the U.S. economy was on a tear going into July. Then COVID infections spiked as the Delta variant spread.

By the numbers: According to preliminary August survey results, the University of Michigan’s consumer sentiment index plunged to 70.2 from 81.2 in July.

• This was the lowest reading since December 2011 and was much worse than the 81.0 level expected by economists.
• The current economic conditions subindex declined by 6.6 points to 77.9, while the consumer expectations subindex dropped 13.8 points to 65.2.

What they’re saying: “It’s just one data point, but sobering,” CIBC Private Wealth CIO David Donabedian says. “It reinforces our expectations of higher market volatility over the course of the year.”

Yes, but: The survey’s chief economist Richard Curtin says, “The extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end.”

• From an economic perspective, emotions are not as impactful as the actual job gains, wage gains and stock market gains that consumers have been experiencing.
• “Sentiment has given misleading signals on spending before and we think it will do again this time,” ING chief international economist James Knightley says.

The big picture: What consumers say or feel doesn’t necessarily match what consumers do. In fact, early evidence from corporate earnings calls and credit card data suggests consumer spending activity has been relatively stable.

• Government-mandated mobility restrictions would be bad for activity. But “we are also highly doubtful that we will see new lockdowns happen in the U.S. given high vaccination numbers that continue to rise," Knightly adds.

What to watch: The July retail sales report, which will be released on Aug.17, will provide a comprehensive, albeit early, read on the Delta variant’s impact on spending during that month.

• But if most of the turn in sentiment occurred in August, we’ll have to wait for the subsequent report on Sept. 16.

Go deeper:Consumer prices rise in July, but rate of inflation slows