Hi chele
I think janh's advice is excellent - the part about a wariness of strange dogs being a good thing, (children need to know never to approach a growling dog, never to disturb or poke a dog that is sleeping or eating, to be gentle, and always ask a grown-up first) and also the idea of giving your ds a toy dog. To take this a step further, maybe after you get him used to a toy dog, follow it with the sort that barks/wags it's tail (more lifelike in other words). And get books and videos out of the library which have positive dog images/stories. Once he is used to that, find a friend's dog who you know is good with children, isn't very big or boisterous etc. Ask for a photo of the dog and show ds this and talk about things dogs do...barking is how they talk, they wag their tail when they are happy, etc. From here, progress to a visit to the dog, but don't push contact, keep it casual. Pat the dog yourself, talk about his soft fur, how he likes to be tickled behind his ears etc...encourage him to try touching him, eventually I really think this approach will work.
I know it's hard for you, especially with bub and all, but I know you will be able to beat this, even though it could take some patience and time!
I agree with the others who suggest talking to your neighbour about her dog - maybe you could call her before you go out if the dog is outside, and ask her to take him out of sight just while you leave the house? Seems extreme, but as your son's fear is extreme, hopefully she will be understanding. Good luck, let us know how you go