Yes, he is confused! Actually, a puppy has absolutely no idea he should potty outside... there is no "should" about it for him. His only "morality" about potty is to potty away from his bed. Puppies also like to potty on absorbant materials, so rugs and such are attractive spots.
You need to TEACH him gently where you want him to go. This is all about building up repetition of the right pattern. As Pawz says, take him outside right away (as well as VERY frequently, before and after eating, before and after naps, after playing, a couple times an hour at this age, unless he is napping in his pen!)
REWARD him with a treat when he potties outside.
Do NOT punish him when he potties inside, or you will make him afraid to potty in front of you (which makes it hard to reward him outside) The puppy will have no idea the punishment is about "inside." Instead he will think its about pottying where you can see him.
You must keep your eyes on him every second when he is loose in the house so you can scoop him up to take him outside if he looks like he might need to potty!
Get this book. It will help you immensely!
Also, we have some good threads here about house training to read up on.
Good luck! and let us know if you have further questions.