A Hair's Breath!
What you notice is correct. Here is a sample of a beautiful sefer written by HaGaon Sadka Houssin around the turn of the century in Baghdad. As you may notice, the writing is extremely exacting/mehudar. Likewise, there is little spacing between the words.
The above phenomenon is not part of a leniency. Rather, it's part of an ancient tradition of what is involved in fulfilling the mitzvah of writing a Sefer Torah Min Hamuvhar. As the RAMBAM clarifies for us, "One should write with very careful and attractive calligraphy, leaving the space the size of a small letter between each word and a hairsbreath space between each letter".
Hilkhot Sefer Torah 7,4
As can be seen, the above directive was carried out with punctilious precision. More so, although the words are very close, one is able to differentiate between one and the other with impressive clarity. Today, we are not as expert, therefore our practice has become to leave a slightly larger space between words.
Rama details the current practice of leaving a bit more space in his gloss to Shulkhan Arukh. "It is necessary to leave a little blank space between each of the words, adequate for writing a letter", Shulkhan Arukh 32,32. As all of you know, the Mishna Berurah is quick to pick on this and clarifies that what is meant is a small yod and not a regular letter.