Personal income climbed by 0.6 percent last month, barely enough to cover the rate of inflation, the Commerce Department reported yesterday. People saved less in May, according to the report, as consumer spending rose by 0.7 percent.

Meanwhile, the Federal Reserve yesterday reported a rise of just 0.1 percent, to 80.1 percent, in capacity utilization of the nation's factories.

Both releases supported the view that the economy has slowed down in the current quarter after its rapid growth in the first three months of the year. However, analysts generally believed that the slowdown will not turn into a deep recession.

In a separate development in Europe yesterday, a senior Reagan administration official defended U.S. economic policy against sharp criticism from allies that high U.S. interest rates are crippling European economies. Deputy Treasury Secretary Robert McNamar told a ministerial meeting of the Organization for Economic Cooperation and Development that the United States does not have an interest rate policy but a "monetary policy that is temporarily producing high rates."

But the administration is now more optimistic about interest rates than a few weeks ago, sources said yesterday. The downturn in rates in the last few days seems to reflect "a considerable turn for the better" in the mood of financial markets, a budget official said.

Murray Weidenbaum, chairman of the Council of Economic Advisers, told a congressional subcommittee yesterday that the strict monetary policies of the Federal Reserve are showing progress in reducing inflation and interest rates.

There was a spurt of money growth in the spring which led the Fed to tighten credit. However, recent figures have shown the money supply falling and interest rates have begun to move down in anticipation of easier credit conditions. The administration has urged the Fed to keep a firm control on the money supply, and not to pay attention to the level of interest rates.

Money policy was discussed at a meeting last night in the Office of Management and Budget organized by Lawrence Kudlow, chief economist at OMB. Outside academics and some financial experts met Budget Director David Stockman and other administration members. The discussion was quite theoretical, according to participants, and focused on how fiscal and money policy could be better controlled, and put across to the public.

Those at the meeting included Lewis Lehrman, New York businessman and key proponent of supply side and monetarist views; Leif Olsen, chairman of Citibank's economic policy committee; Herb Stein, former CEA chairman, and Anna Schwarz, a monetarist economist.

Weidenbaum told the Joint Economic Committee's subcommittee on trade productivity and economic growth that sustained control of the money supply would have even more success in bringing down inflation and interest rates. He and Treasury Undersecretary Norman Ture testified that enactment of the president's economic program would help to raise investment and increase productivity.

The administrtion hopes to boost saving with its tax plan. Yesterday's personal income figure showed a 2.1 percent drop in personal savings in May to an annual rate of just over $100 billion.

The saving rate, which measures the proportion of income that is saved, was up slightly in the previous month to 5 percent of personal income. Personal income was at a seasonally adjusted annual rate of $2.4 trillion in May, while spending totaled $1.88 trillion.

Robert Gough of Data Resource and David Ernst of Evans Economics predicted that after the current slackening in growth, the economy would pick up again at the end of the year.