That... is a good question. Most of the time it seems like they don't, but then in some flashback moments, and other situations similar to those, it seems like people understand him.... bah, who cares, he is pretty dang funny either way haha.
Brian understands him. As well as everyone in the flashbacks/cut scenes. Other than that no one understands him, although they do understand his emotions. In an episode i just saw louis knew she was being threatened but didn't understand the intensity of the threat.
i think every one does but he is a baby so they think it is cute and go in with there buisnes. because they think what can a baby do but we all know he has a few tricks up his sleeve.