I have a 2003 4x4 SE Xterra.

Here's what I tested:
Turn off recirculation, Turn off A/C, Turn on Fan, humid air comes out.

Turn on A/C, hear slight noise, air turns cooler and less humid. Turn off A/C, air turns humid and less cold.

Turn on recirculation, Turn off A/C, Turn on Fan, humid air comes out.

Turn on A/C, slight noise again and the air turns cooler and drier. Turn off A/C, air gets warm and humid.

It seems to be working properly for me.