While the “R” word — recession — has been tossed about frequently in economic discussions, a quarterly economic forecast maintains that the word need not be a part of the dialog, at least in the short term.

“Now there are countless prognosticators throwing around recession. That may be the best indicator that a recession is not coming soon,” stated Ed Leamer, director of the University of California, Los Angeles, Anderson Forecast.

“Better remember a recession is not measured by the frequency with which the newspapers use the ‘R’ word. To have an official recession commencing anytime soon, we would have to experience a rapid rise of the national unemployment rate” from a level of 4.6 percent to about 6 percent by the end of 2008 — a loss of about 2 million jobs.

Not to say there is not risk of recession — Leamer’s report states that “there really is some significant recession risk out there.”

While the construction sector has been losing jobs, that alone won’t be enough to tip the scale toward recession, Leamer states in his latest forecast report, titled, “Nervous: Why this time is really different and why we will survive the near recession experience.”

While past U.S. economic cycles have featured a fattening and trimming in manufacturing jobs, this time around there has been no such fattening. Manufacturing jobs have been in a slow decline.

Leamer states, “The bad news is that we lost 3 million manufacturing jobs in 2000-01 but the good news is that there aren’t many more to lose.”

His forecast is that employment in sectors other than manufacturing and construction should hold up, though it notes that overall expansion in employment has been weak — gaining only 6 percent since the last major economic downturn in 2001.

Some economists had said that home prices would not tumble and foreclosures would not surge without job losses stemming from a recession because that would be unprecedented.

But “innovations of the subprime mortgages in the form of greatly reduced lending standards created a new class of borrowers who are now walking away from their homes, not because they lost their jobs but instead because they cannot afford their homes on their current incomes.”

In other words, there is now a disconnect in the housing market and jobs market.

“If we can get through another couple of quarters without rising joblessness, we will have completed the first and hardest part of the housing correction, and the drag that housing is creating for the economy will substantially abate,” Leamer stated.

Of course, the pain in the housing market will likely continue, with several years of price declines and depressed levels of new construction, Leamer predicts.

As for more Fed rate cuts, Anderson Forecast senior economist David Schulman said in his own report that he envisions a Fed Funds rate of about 3.5 percent or lower by mid-2008, with the 10-year U.S. Treasury bond trading in the 3.75 percent to 4.5 percent range.

“Should the Fed fail to ease significantly we believe our ‘no recession’ forecast would be at significant risk. Historically the markets tend to lead the Fed, not the other way around and before too long we suspect the Fed will follow.”

With deterioration in housing credit, losses on mortgages are estimated at about $400 billion, Schulman stated.

Even Freddie Mac is facing a “capital adequacy problem,” he said in the report — “So much for the government-sponsored credit entities becoming the proverbial cavalry to rescue the mortgage market.”

The collateral damage associated with the credit meltdown is widespread, Schulman states, reaching municipal bond insurance companies and impacting the cost of finance for state and local governments. Faith in credit-rating agencies has been “severely weakened,” he states.

A key to the Anderson Forecast’s “no recession” forecast is resiliency in the overall economy and stock market, and Schulman cautions: “there are more than usual uncertainties around the 2008 forecast than in prior years.

“For example, before 2008 is over the markets will have to overcome the anxieties associated with the presidential election and we may be even more concerned about both anti-inflation policy and the potential for a post-Beijing Olympics hangover in China.”

A separate Anderson Forecast report on California, prepared by economists Ryan Ratcliff and Jerry Nickelsburg, predicts that the state, like the nation as a whole, will avoid recession.

“The combination of real estate weakness, government belt-tightening and Hollywood labor disputes all create a sluggish economy for most of our forecast, but we still do not see enough systematic weakness for a recession,” the report states.

A quarterly Census report on employment and wages suggests that the state’s job market may be worse off than previously thought, and the financial activities sector lost 21,000 jobs in the state through first-quarter 2007 after peaking in May 2006.

State unemployment should peak at about 6.1 percent in late 2008, according to the forecast, which also predicts a 74,000 total peak-to-trough job loss in the state’s construction sector.

***

What’s your opinion? Send your Letter to the Editor to glenn@inman.com.

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