Perhaps screenshots will make it clearer. Here's the home screen:
If I click the microphone icon, I get this:
The timeline scrolls, and the timer in the top right counts up. If I dictate into the watch, there is no waveform that would indicate that something is being recorded. When I tap the red button at the bottom, the timeline stops scrolling, and the timer switches to "Save":
If I click "Save," I am taken back to the home screen, but with the message "Recording created on Apple Watch" -- but as far as I can tell, no recording has been created on the Apple Watch at all.
I should point out that I can create text notes by dictating into the watch -- but that employs the plus-sign icon, not the microphone icon. The Search function works also.