The cloud overhanging the US economy lifted noticeably on Friday with news from the Commerce Department that the year's second quarter yielded a 3.1% increase in the rate of annual growth.

This revised figure is significantly better than the 2.4% growth forecast earlier in August, and more than double the 1.4% annual rate achieved during each of the two preceding quarters.

But euphoria was held in check by the fact that the hike owes as much to a massive increase in military expenditure as it does to stronger consumer demand. In the April-June period federal defense spending rose by 45.9% – its largest leap since the 1952 war in Korea.

And as Bill Chesney, chief economist for John Hancock Financial Services in Boston, remarked of the ongoing lethal contretemps in Iraq: “It has to be remembered that war is, unfortunately, good for business.”

It is also expected (by Joel L Prakken of Macroeconomic Advisers) that defense spending will be “immense” in the second half of 2003.

Explains Prakken: “The most recent estimates of the ongoing costs of our presence in Iraq are much higher than we had assumed.” This, he says, will translate into continued high levels of defense expenditures in 2004 – good news for the US military edifice if not the US taxpayer.

• Meantime in Japan, the globe’s second most technologically-powerful economy after the US (and third largest overall behind the US and China), there are omens of yet another recovery – the fifth after four previous ‘false dawns’ in a decade.

Economic output powered ahead in the quarter to June 30, growing at a 2.3% annual rate — three times forecasters’ expectations. Exports also surged, growing 5.6% in July.

The haruspices are (as ever) divided. “Japan's economic fundamentals have finally changed for the better [laying foundations for] a shift to a permanently higher-growth trajectory,” opines Barclays Capital.

No way José, says Stephen Roach, chief economist at Morgan Stanley: “We're in another one of these periods where the Japanese economy moves up for a while, then lacking any meaningful progress on structural reforms, there's a relapse another nine months down the road.”

Wavering investors are advised the follow the Cockney aphorism: “Yer pays yer money and yer takes yer choice.”

Data sourced from: USA Today and The Washington Post Online; additional content by WARC staff