On the back of the continued high level of economic activity, Israeli businesses raised their average 12-month inflation projections from 2 percent in the second quarter to 2.65% in the third, suggesting that the economy was drawing closer to its production capacity potential. "Economic activity continued to grow at a fast pace in the third quarter and expectations for the next quarter are for continued rises in all industries except for the construction industry," the Bank of Israel quarterly companies report for the third quarter of 2007 stated. The average inflation rate projected by the 462 surveyed businesses for the 12 months through August 2008 was 2.65%, up from the 2% predicted in the previous survey. About 27% of the companies participating in the survey, released Sunday, predicted that inflation would exceed the 1-3% inflation target of the central bank. In addition, local businesses predicted that the shekel-dollar exchange rate would find itself at NIS 4.41 at the end of September 2008 and NIS 4.14 by the end of the last quarter of this year. The average exchange rate on the day companies reported was NIS 4.08 to the dollar. Sector-by-sector analysis showed continued large growth in manufacturing output boosted by higher exports and domestic sales. "Companies expect the increases in orders, particularly for exports, to continue in the next quarter," the report stated. Meanwhile, construction companies reported lower activity in the reviewed quarter on the back of a moderate increase in construction of buildings and no change in infrastructure construction, which could lead to a slowdown in the next quarter. Transport and communications companies benefited from increased sales of services to Israelis in the third quarter, while sales of services to foreigners rose more slowly. Hotels and tourism companies saw a rise in activity in the third quarter, showing signs of recovery from the the Second Lebanon War, reporting a steep increase in the number of foreign tourists' bed nights and a higher number of Israelis' bed nights compared with the same quarter in 2006.