I took out my U-joint and the back half of the knuckle slides side to side 1/8 of an inch and the front half 1/16 of an inch. The cups fit tight with no twisting movement. Is it good enough for many more miles?
Sounds perfect to me. Once installed this movement will be no problem because the driveshaft and the transmission output shaft supports it against this side movement.
I would check the surface of the u-joint that runs against the bronze bushing that is driven in the driveshaft housing. Sometimes that thrust surface needs dressing up a little dressing up so they are smooth.