Has U.S. economy dodged a recession?

Meanwhile, the Federal Reserve is continuing its “steady-as-she-goes” policy of trying to let the economy gradually pick up speed — without overheating. At their May 9 meeting on interest rates, the central bankers said they felt that inflation was still a bigger threat than a worsening slump, according to minutes released Wednesday.

But those minutes made clear the Fed’s assessment that the economy is not out of the woods yet, a belief shared by some private economists. The slow-motion unwinding of the housing market remains one of the biggest concerns. With this year’s spring selling season washed out, many forecasters don’t expect a rebound in housing until next year at the earliest.

Many borrowers who got in over their heads in the recent mortgage lending spree have yet to formally default on their loans, and foreclosures on those loans are expected to remain high through 2007. If housing prices continue to fall, that could put a deep crimp in consumer spending. That has some market watchers warning that a further housing downturn could bring a recession with it.

“In each of the seven prior housing declines, six of them ended up in full-blown recessions, one ended in a mini-recession,” said Hugh Moore, partner at Gerhard Advisors. “We believe we'll have a recession in late '07, early '08.”

Economists surveyed this month in the closely watched Blue Chip economic forecast pegged the odds of a recession within the next year at 26.1 percent — up slightly from 24.4 percent in the prior survey. But they still see the economy picking up stream in the current quarter. On average economists expect second-quarter GDP growth of 2.2 percent, according to the survey.

While most forecasters see growth picking up, that outlook is based on both interest rates and inflation remaining low. The Fed already has said inflation is running too high to justify a cut in short-term rates. Long-term rates have stayed relatively low in part because of strong investment, especially from overseas.

That investment is being fueled, in part, by strong global growth — especially in emerging economies like China and India.  A slowdown in those economies could reduce the flow of cash to the United States. That, in turn, could force interest rates higher, creating a major headwind for the U.S. economy.

Energy prices are another wild card that could throw off forecasts for a slow but steady recovery. So far, record gasoline prices haven’t put a dent in demand at the pump, and consumer spending on other purchases continues to hold up. But with that spending responsible for 70 percent of U.S. economic activity, any slowdown by consumers could take a big bite out of the overall economy.