The U.S. trade deficit widened to the highest level in more than two years in July as businesses likely front-loaded imports in anticipation of higher tariffs on goods, suggesting trade could remain a drag on economic growth in the third quarter.

While the surge in imports reported by the Commerce Department on Wednesday would subtract from gross domestic product, it was an indication of strong domestic demand and inconsistent with financial market fears of a recession.

“The July trade data suggest that net trade will weigh on third-quarter GDP growth, but that is hardly cause for concern when it reflects the continued strength of imports, painting a better picture of domestic demand than renewed recession fears would suggest,” said Thomas Ryan, North America economist at Capital Economics.

The trade gap increased 7.9% to $78.8 billion, the widest since May 2022, the Commerce Department’s Bureau of Economic Analysis said.

The government revised the trade data from January through June 2024 to incorporate more comprehensive and updated quarterly and monthly figures.

Imports increased 2.1% to $345.4 billion. Goods imports rose 2.3% to $278.2 billion, the highest since June 2022. They were boosted by an increase in capital goods, which increased $3.3 billion to a record high, mostly reflecting computer accessories.

Imports of industrial supplies and materials, which include petroleum, increased $2.8 billion. There were also rises in imports of nonmonetary gold-finished metal shapes.

President Joe Biden’s administration has announced plans to impose steeper tariffs on imports of Chinese electric vehicles, batteries, solar products and other goods.

The government said last week a final determination will be made public in the “coming days.” There are also fears of even higher tariffs on Chinese imports should former President Donald Trump return to the White House after the November 5 election.

The politically sensitive goods trade deficit with China increased $4.9 billion to $27.2 billion. Exports to China fell $1.0 billion while imports advanced $3.9 billion.

“Imports of goods from China increased, which shows how difficult it will be to direct U.S. manufacturers away from their dependence on lower-cost goods originating from China if that is what Congress and political candidates wish to do,” said Christopher Rupkey, chief economist at FWDBONDS.

Exports gained 0.5% to $266.6 billion. Goods exports climbed 0.4% to $175.1 billion. Exports of motor vehicles, parts and engines decreased $1.7 billion to the lowest since June 2022. Consumer goods exports fell $800 million.

Exports of capital goods surged $1.8 billion to a record $56.1 billion, boosted by semiconductors.

The goods trade deficit increased 6.9% to $97.6 billion after adjusting for inflation.