By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer confidence nudged up in May, suggesting the worst of the novel coronavirus-driven economic slump was likely in the past as the country starts to reopen, but it could take a while for the economy to dig out of its hole amid record unemployment.

Signs the downturn could be close to bottoming were bolstered by other data on Tuesday showing the pace of decline in manufacturing activity in Texas and services industry contraction in the mid-Atlantic region easing this month.

"The worst may be over for the economy," said Chris Rupkey, chief economist at MUFG in New York. "We still can't see a V-shaped recovery, but at least this is looking like the shortest recession in history which will be measured in months not years."

The Conference Board said its consumer confidence index edged up to a reading of 86.6 this month from a downwardly revised 85.7 in April. Economists polled by Reuters had forecast the index rising to 87.5 in May from the previously reported reading of 86.9 in April.

Businesses across the country are opening doors after shuttering in mid-March as states and local governments took drastic measures to slow the spread of COVID-19, the respiratory illness caused by the virus, almost grounding the country to a halt. The economy contracted at its deepest pace in the first quarter since the Great Recession and lost at least 21.4 million jobs in March and April.

Recessions in the United States are called by the National Bureau of Economic Research, which does not define a recession as two consecutive quarters of decline in real gross domestic product, as is the rule of thumb in many countries. Instead, the NBER looks for a drop in economic activity, spread across the economy and lasting more than a few months. Economists believe the economy slipped into recession in March.

Stocks on Wall Street rallied, also spurred by optimism about a potential COVID-19 vaccine. The dollar weakened against a basket of currencies. U.S. Treasury prices fell.

The Conference Board survey's present situation measure, based on consumers' assessment of current business and labor market conditions, fell to a reading of 71.1 this month from 73.0 in April. This gauge has declined by nearly 100 points in the last couple of months, underscoring the impact of COVID-19.

But the expectations index based on consumers' short-term outlook for income, business and labor market conditions climbed to 96.9 from a reading of 94.3 in April.

SOME IMPROVEMENT

Despite the improvement in expectations, households remained worried about their finances. They also anticipated higher inflation, which could lead to perceptions of reduced purchasing power and hurt the much-needed consumer spending.

The Conference Board's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, improved to a reading of -10.4 in May from -15.7 in April. That measure closely correlates to the unemployment rate in the Labor Department's employment report.

The percentage of consumers expecting an increase in income dropped to 14.0% this month from 17.2% April and the proportion anticipating a drop fell to 15.0% from 18.4%.

The improvement in the data tone was echoed by a survey from the Dallas Federal Reserve on Tuesday showing Texas factory activity falling again in May, but at a slower pace compared to April's record plunge. Similarly, services industries in the mid-Atlantic region reported a continued decrease in activity, but a pulling away from a historic slump in April.

Separately, the Commerce Department said new home sales increased 0.6% to a seasonally adjusted annual rate of 623,000 units last month. Still, the gain left the bulk of March's 13.7% plunge intact. Economists had forecast new home sales, which account for about 10% of housing market sales, diving 21.9% to a pace of 480,000 units in April.

While the sales gain was at odds with data last week showing home resales logging their biggest drop in nearly 10 years in April, and homebuilding and permits suffering record collapses, it added to rising mortgage applications and homebuilder confidence in offering a hopeful sign for the housing market.

"This is perhaps another sign that demand for housing has remained strong despite the record spike in unemployment and social distancing restrictions which have limited house shopping this spring," said Ben Ayers, senior economist at Nationwide in Columbus, Ohio.

Last month, new home sales rose in the Northeast, Midwest and South, but dropped in the West. About 47% of new home sold were priced below $200,000. As a result, the median new house price in April decreased 8.6% from a year ago to $309,900.

A fifth report on Tuesday showed the S&P CoreLogic Case-Shiller 20-metro-area house price index increased 3.9% from a year ago in March after rising 3.5% in February.

Separately, the Chicago Fed reported a historic plunge in its measure of economic activity in April.

(Reporting by Lucia Mutikani, Editing by Franklin Paul and Andrea Ricci)