Carbon seal!
If you physically pull back on that boot, then yes, water will come into your hull. The carbon seal that the boot clamp is tightened down on rides against a stainless plate that is part of the shaft. With the doo in the water, looking at that shaft and there is no water coming out.....then the carbon seal is good. If is't leaking pretty bad, then tighten up the clamp or check to see if the carbon seal has broken.
More research....the carbon seal is actuall called the Ring Carbone (part # 2720000420) and goes for about $35 and the stainless plate is actually called the Ring Seal Carrier (part #272000064) and will cost you about $40 bucks. There are also two O-rings in there that should keep the carbon ring up against the stainless plate, but it's common for you to be able to pull that boot back and watch the water just pour into your hull.......
BTW, to replace these parts, you must remove the jet pump. If you find the carbon ring is broken and needs to be replaced, then I'd do a good inspection of your pump while it's out.